Globalization has led to group enterprises engaging in connected transactions that are frequent, significant in amount and diverse in nature.
Facing the rapid development of business, how group enterprises can accurately implement transfer pricing policies according to their business processes, which are an important point to improve synergy, effectively control risks, optimize the overall competitiveness of the group and promote corporate compliance within the group.
Total Process Management
The whole process of transfer pricing management includes multiple segments, from strategy planning to execution, each of which is an indispensable part of an enterprise’s connected transaction management.
Among them, Operational Transfer Pricing (OTP) is an end-to-end process in which an enterprise’s business, finance and tax departments connect internal links to properly implement transfer pricing policies and reflect in the financial statements of the relevant legal entities. Specifically, transfer pricing management includes:
(1) initial price setting;
(2) tracking and adjustment during the period;
(3) demand and joint response from other business departments; and
(4) risk assessment and analysis.
|Initial price setting|
|Under the Group’s transfer pricing model and policy, sorting out and summarizing the income statement or non-income statement items required for each strategy. Set prices for each segment based on the above data and related information.|
|Tracking and adjustment in progress|
|Conducting monthly/quarterly price adjustments based on updated financial budgets and financial statements. Analyzing and correct variances between target profit levels and actual results.|
|Responding to the needs of other sectors|
|Completing customs’ filing requirements and restrictions on bank payments for price changes in import and export enterprises under customs supervision. Group information system restrictions. Specify business requirements of business departments. Restrictions of industry regulators.|
|Risk assessment and analysis session|
|Measurement of specific risk exposures due to differences in results from the needs of other business units. Prepare explanations of risk exposures in advance in case of inquiries. Implement risk mitigation measures.|
Difficulties and challenges in transfer pricing operations management
Transfer pricing operations management cannot be solved individually by the tax department, such as simply setting up a digital system to implement the pricing process for connected transactions; it requires dealing with more complex and diverse business and tax issues, including responses to different requirements from various business units and external regulators.
Simultanously, transfer pricing operations management is not a freeze-process, but requires continuous tracking, adjustment and improvement throughout the year.
|Diffculties in the management of transfer pricing|
|Restrictions||Transfer pricing by multinational enterprises, particularly cross-border connected transactions, is subject to direct and indirect taxes (e.g. VAT, consumption taxes, etc.) and other non-tax factors (e.g. anti-dumping, the impact of foreign exchange controls, etc.). The regulatory requirements for cross-border connected transactions of multinational enterprises vary from case to case.|
|Coordination||Transfer pricing operations management needs to realize upstream and downstream connections. There are often links between business entities within a group, and adjustments in a single dimension often impact on the overall value chain. Each entity’s development stage may also be different, making it impossible to manage transfer pricing from a global perspective and creating transfer pricing risks.|
|Timeliness||Pricing time pressures are high as accurate linked transaction pricing requires not only a large amount of data to support it, but also calculations based on the data and pricing logic, and business often need relevant personnel to respond to pricing needs in a timely manner.|
|Pricing||Accurate pricing of connected transactions involves not only the conventional target profit range, but also historical profits, sales plans, supply chain information and many other data. Companies consider safety stock and shipment time limits, customs price controls, bank foreign exchange controls, and other practical pricing issues.|
Which companies need to improve their transfer pricing operations management
When a company is faced with the following scenarios, management and the finance department are advised to review the current situation of the company’s transfer pricing operations to identify potential margins for optimization and enhancement, including:
1. Overseas business development stage or more complex overseas business.
2. The profit level of the business deviates significantly from the transfer pricing policy, and the business, which bears simple, functional risk, incurs a loss concerning its cross-border connected transactions.
3. The business has been required to make year-end transfer pricing adjustments
4. The tax authorities have questioned or investigated the business for low or volatile profit levels arising from connected transactions.
5. The wide range of products and the complexity of pricing calculations for connected transactions require the business to invest a significant time in repetitive and cumbersome calculations.
As the last process in the transfer pricing process of “strategy, planning to execution”, transfer pricing operation management of enterprises needs to face various challenges, such as multiple constraints, coordination difficulties and pricing problems. Market conditions, business activities and the regulatory environment constantly changing, so relying solely on pre-set transfer pricing policies will not help each group entity achieve its desired goals. Effective transfer pricing operations should be adaptable to changing business and regulatory environments.
The difficulties and challenges of transfer pricing operation and management vary among different enterprises based on different industry situations, business models, business needs and development stages. Enterprises should promptly sort out the practical problems in the process of transfer pricing operation and management, strengthen the synergy with business departments such as supply chain, compliance, finance, government relations, etc., and make full use of digital tools to promote the implementation and management of transfer pricing policies.
Finally, with the development of international anti-tax avoidance and the promotion of the two-pillar program in multiple countries, the transfer pricing and tax information available to tax authorities in various countries has significantly increased, and how to analyze the data of the transfer pricing information obtained and control the potential tax risks in various parts of the world has become the focus of various multinational groups.
Meanwhile, under the trend of data integration of domestic tax systems, the management of multinational groups also needs promptly consider the efficient and collaborative operation and compliance management of business, finance and tax.
Companies have the ability to create a comprehensive transfer pricing system that meets their specific requirements. This system can assist with managing internal transfer pricing, maintaining compliance, planning taxes, and monitoring activities remotely. By utilizing this system, companies can ensure they are meeting tax and transfer pricing compliance standards and seek tax planning solutions that optimize overall group taxes.