All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

TP data automation holds the key to CbCR success


Country-by-country reporting (CbCR) has intensified the focus on data quality among companies and is a key factor in the drive towards automating some transfer pricing compliance.

CbCR requires taxpayers to meet the gold standard for filing documentation on TP arrangements. The OECD’s BEPS project has raised the whole compliance burden of businesses all over the world. As such, the underlying data is now a vital part of the formula for tax and TP success.

“There is an increasing need for tax professionals to understand what is inside and how to extract the right information,” the head of TP at a financial transfer service told TP Week.

“When it comes to the larger global multinationals, there are a number of areas where technology is likely to be useful – data analytics, documentation and keeping up to date with legislative developments,” they explained.

A lot of companies have to file reports on their arrangements in multiple jurisdictions. This is especially true since the advent of master file and local file. It’s much easier to file reports for 50 to 60 countries if you have a digitally formatted approach.

If one country changes the reporting rules, it’s possible to tweak the existing software to adjust to the new standards. This goes a long way towards reducing the sheer amount of paperwork involved. However, the success of TP technology all comes down to data quality.

On the other hand, one tax director at a software company pointed out that TP automation is a lot harder than author areas of taxation because it has to be dynamic and potentially change based on volumes sold. “That has to be reflected in FX rates and pricing.”

How to structure intangible assets for TP purposes is an additional area that is not necessarily going to be made easier by digital tools. Data management will be crucial and compliance mechanisms might be streamlined in this way, but all software comes with in-built limits.

Finding a role

This isn’t to say that the limits can’t be changed. It may be easier to automate VAT systems, but there are ways of providing technical support to a company’s wider tax strategy. The role of technology could be expanded to provide back-up for TP despite transfer pricing often involving subjective concepts and arguments over subtle differences.

“While the nature of VAT means technology has been more important, there are ways to leverage tech tools in transfer pricing and other taxes as well,” the head of TP said. “For example, analytics and dashboards would be helpful in providing a quick group-wide view of any problem areas at any given time.”

The advantages of automating TP and VAT are clear for most businesses. It’s just easier to apply technology tools to a concrete area like VAT or GST, whereas transfer pricing involves a lot of subjectivity. It’s even less clear when it comes to corporate tax.

“There are less obvious reasons, or immediate needs, for technology when it comes to complying with corporate tax than streamlining the way expenses are analysed ,” the head of TP said.

It may be possible to extend real-time compliance systems across transfer pricing one day, but the question of cost can’t be ignored – especially by multinational groups. All areas of tax are usually subordinate to the business strategy.

“It’s rare for this to lead to a tax-only solution,” the head of TP said. “So the key is to make sure tax requirements are considered as part of any finance system builds or upgrades.”

“If your organisation is compliant with its tax obligations, it is not difficult to see why there might be resistance to spending money on technology,” they added. “This means tax departments must be able to articulate why it is important, the risk of not thinking ahead and the clear benefits of adopting the proposed solution.”

In-house TP professionals face a high-bar to justify the cost of new technology. Tech tools are often just an option – not a necessity – and this means the natural limits of a budget can hold back innovation.

One TP executive at an energy company warned against automation for the sake of automation. “The focus is often on money when it comes to automation and tax technology, but it’s not always the best solution necessarily,” they said. “Sometimes it can even lead to poor solutions.”

At the same time, the business case for automation can be made on cost management. Tax teams play a key role in managing a company’s costs, thereby supporting the overall business strategy. It can streamline the compliance process and make things far more efficient.

“Transfer pricing is sometimes considered to be much more an art form than an exact science in order to  optimise  in such a way that is compliant with all local requirements,” the head of TP said.

Data management is not just about ensuring high-quality information, however. It can help a business plan ahead for different contingencies. This is where TP technology and business objectives meet.

“Having a tool could allow you to better visualise what the results might look like and to more easily identify anomalies,” the head of TP said. “It’s about bringing the data to life to help model the impact of decisions.”

Keeping up with change

There are increasing local challenges, as well as international pressures, for companies to overcome when it comes to data management and technology solutions. The UK revenue service is in the process of rolling out Making Tax Digital (MTD), starting with VAT but the ultimate aim is to digitise the entire tax system to match the changes in the economy.

“We live in a world where technology is everywhere, so adopting a technological solution to help solve a problem is absolutely fine if it means saving time and money in the long run,” the head of TP said. “The problem comes when piece-meal solutions are introduced without a longer-term technology roadmap.”

This is just as the tax authorities are turning to technology as a way to catch-out taxpayers. The electronic transfer of data under the automatic exchange of information and the numerous CbCR reports are just two such examples .

Technolog y may be crucial for tax authorities that have seen their staff numbers reduced and budgets cut, but whether new IT systems can make up for these losses is up for debate.

“The tax authorities are using new technologies to crackdown on tax avoidance, but the data analysis is often very poor and many small cases of avoidance are missed,” the tax director said. “Many tax authorities, including HMRC, look for the big picture and miss out the small details.”

Technological advances may not eliminate fallibility, as every system might only be as good as the last upgrade. The danger of falling behind will become more pressing for taxpayers as they face more aggressive tax authorities.

It might be a long time before technology offers a solution, but until then the individual will always play a decisive role in avoiding errors that could lead to serious problems later. Transfer pricing is about solving problems before they arise.

More from across our site

Japan reports a windfall from all types of taxes after the government revised its stimulus package. This could lead to greater corporate tax incentives for businesses.
Sources at Netflix, the European Commission and elsewhere consider the impact of incoming legislation to regulate tax advice in the EU – if it ever comes to pass.
This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree