Advantages of implementing operational transfer pricing
Carlos Pérez Gómez and Dan Paul Hernández de Aguirre of HLB MAAT Asesores explain the benefits of having an operational transfer pricing process.
The latest legislation updates applicable for transfer pricing (TP) purposes in Mexico and worldwide represent a challenge regarding the correct registry and transfer prices implementation as part of the accounting and economic processes for multinational groups that could be solved through technology. This is emphasised as the operations of the multinational group and the TP framework are becoming more complex and extensive in all countries, as well as a significant and growing perception of risks in TP areas by the tax authorities.
The OECD, through the BEPS project, foresees a series of actions as a reference to adequately handle the data from multinational companies, coherence of internal policies, reinforcement of substantial requirements in current international standards and the improvement of transparency. This is the case of Action 13, which requires significant qualitative (local file and master file) and quantitative information (CbC Report), which once again grants the multinational companies an opportunity to strengthen procedures with quality standards, adequate data management as well as being able to efficiently portray the impact concerning TP on the taxable income of the entities that are part of the multinational group.
The Actions of the BEPS Plan propose the implementation of TP policies in a comprehensive context, as well as efficient data management and double taxation risks, to find better decisions and multilateral agreements, thus giving a greater motivation to review the operational transfer pricing (OTP) process.
The OTP is a comprehensive process consisting of a series of steps which begin by identifying and analysing the intercompany transactions, conducting a compliance analysis, to the financial reporting and registration process to ensure solid monitoring, maintenance and continuous analysis of the process ‘from end-to-end’ and the resulting repercussions on TP, preventing subsidiaries from managing their TP policies locally and differently to reduce the risk of unilateral adjustments and possible unduly exposure to tax risks.
The design and planning of TP policies is essential because it provides guidelines for the application of how intercompany transactions should be established in an economic, legal, commercial and consistent sense with applicable laws, as well as avoiding the disparities affecting the reported numbers, which may translate into TP adjustments at the end of the fiscal year or the possibility of double taxation, penalties and/or prolonged audits that create significant disruptions.
Some fundamental elements in the planning and design of TP policies are the following:
A global TP policy supported by an appropriate economic analysis as well as consistent with the factual depiction of functions, assets, risks, and intellectual property of the related parties;
Intercompany agreements between the entities involved focused on the background of the transactions in order to mitigate the risks of incorrect conceptualisation;
A global management framework, as well as analysis and supervision processes that determine and facilitate compliance with TP policies; and
Updated documentation showing that the established policies applied comply with the ‘arm’s-length’ principle by the end of the fiscal year.
At the planning and design level, the mechanism to carry out these policies efficiently and consciously is (i) defining the main risk areas; (ii) identifying the flows of intercompany transactions; (iii) establishing the technical valuation process in which various economic methods are identified; and (iv) the evaluation of the operational impact on the flexibility of a given policy choice.
The functionality of the internal systems of each company (i.e. enterprise resource planning) must cover the specific needs, without leaving behind the impact on its accounting and fiscal requirements of intercompany operations, such as invoicing, electronic accounting or analytical work papers, in accordance with the legislation of each country.
OTP focuses on proactive analysis and monitoring that is executed continuously in order to identify any problem on time and to be able to solve it efficiently. An adaptable solution allows a company to identify TP risks in a timely manner, determine adjustments and avoid indirect tax problems, always distinguishing a proactive approach rather than a reactive one.
An efficient OTP will be one that aligns the TP objectives with the commercial ones, promoting compliance with each applicable legislation, reducing complexity, providing strategies and promoting better decisions at all times.
The key factors in achieving an efficient OTP system rest on the management framework, the designated owner of the global TP process, the operational design of the OTP model, and technology adaptability solutions.
The operational design of the OTP model is an essential element in the OTP system, since it is the resource through which the data included in the system will be analysed, therefore it is necessary to map the data process and divide it into four phases: (i) identification of intercompany transactions; (ii) determination of prices and costs; (iii) registration process for reports; and (iv) monitoring, maintenance and analysis to ensure that these measures are reviewed and applied according to the inputs and results of the system.
The concept of OTP has been evolving and it has become relevant in processes involving TP and technology, due to the need to clean inconsistencies in the data and thus the coherence of the TP analysis.
For the effective application of an OTP, it is important to be realistic and have full knowledge of the business and the problem to be solved because, by doing so, there is a good chance of having a long-term benefit. This, without a doubt, must be complemented by an in-depth analysis of the TP structure, characterisation of the entities and the previously established compensation mechanisms.
Having an OTP will significantly help towards providing an accurate and timely response to questions and requirements made by the tax authorities, reducing response times and the administrative burden required in these processes.
Carlos Pérez Gómez
Partner, HLB MAAT Asesores
Dan Paul Hernández de Aguirre
Director, HLB MAAT Asesores