How Financial Institutions Can Avoid Transfer-Pricing Risks

Henri Wajsblat, Anaplan’s Head of Financial Services Solutions, interviews PwC’s operational transfer pricing expert, Peter Barlow, on how technology can help lower the risk associated with transfer pricing processes in financial institutions.

Q: Over the last few years, some international retail and consumer goods firms have made headlines due to their abnormally low income taxes, which raised questions about their transfer pricing practices. How would you define the transfer pricing challenges for international firms?

A: Transfer pricing (TP) is a difficult issue for multinational entities (MNEs) to manage. The OECD’s Base Erosion and Profit Shifting (BEPS) initiative has led many MNEs to review their value chain, TP policies and wider processes to ensure value creation is aligned with functions and substance. On top of that, BEPS will mean a lot more transparency is provided to tax authorities about the business, to help them identify the right cases for tax audits. It remains to be seen whether that additional transparency will help, but it’s highly likely to lead to more controversy around TP.

As such, it is vitally important that transfer prices are executed in line with TP policy, and that they can be evidenced as such by management through repeatable pricing and profit review processes and governance. In addition, organisations must have sufficient information at their fingertips to respond to higher levels of questioning from tax authorities. Technology certainly has a role to play in that.

Q: How does BEPS apply to financial institutions, and what are the associated risks?

A: Financial institutions have complex cross-border booking models and value chains for many of their products. Front-office functions (like sales, trading, distribution, and origination) as well as back-office functions will be subject to TP policies. The risk of not executing TP accurately could be costly and trigger some reputational damages. Many organisations are aware of this and are moving away from manual spreadsheet-based processes to more systematic ways of executing TP.

Q: Can technology help automate the TP process?

A: Technology is a key part of the solution. Many TP policies cover high-volume businesses like sales, trading and back-office services. Using a systematic, technology-led approach, groups can automate TP processes and ensure that policy is followed with minimal errors and less reworking across the full, end-to-end process. In many cases, they are also looking at ways of aligning data needs for TP with allocation of services for management information, regulatory reporting, and VAT.

Q: What must-have functionalities should tax executives expect from their TP tools?
 
A: TP processes would typically involve the following requirements:

• Data validation and control
• Price calculation and true-ups
• Booking and invoicing
• Reconciliation and reporting
• Transfer pricing documentation