KPIs vital to transfer pricing success, say experts
Robust key performance indicators are essential to business success and to helping companies justify transfer pricing transactions, say three in-house experts.
Tax leaders say that multinationals should embrace key performance indicators in their businesses to ensure effective transfer pricing policies and reduce audit risks.
The calls follow an increase in international tax regulations, including the OECD’s two-pillar solution, BEPS and the Tax Cuts and Jobs Act, which have put companies on high alert.
These regulations have led businesses to seek greater certainty about their tax positions and to look to ease the potential for controversies as well as the risks of inter-company pricing disputes.
Piotr Wierzejski, TP partner at international tax consulting firm WTS & SAJA in Poland, says that KPIs can be a useful tool for monitoring internal operations and to support tax positions during audits.
“KPIs can be used to convince tax authorities of what they [companies] were doing at a particular point in time, and that they were acting in the most accurate and effective way,” he says.
Performance measures can also be useful for demonstrating to tax authorities that a business is well run and that it has acted in good faith when transferring profits between jurisdictions, he adds.
KPIs are a barometer for judging the business and the success of its TP policies, says Sandra Esteves, head of tax at software and data management company Talend in the Netherlands.
“I don’t think a tax organisation can survive or be successful without KPIs,” she says.
Daniel Salvadores, vice-president for global tax at the global accommodation and hospitality firm Selina in Spain, emphasises the need for businesses to do more to ensure KPIs align with their TP objectives.
“It is very much neglected; companies are focused on compliance and risk management,” he says of the link between KPIs and TP policies.
However, there is no one size fits all when it comes to KPIs.
Companies should look at introducing a series of bespoke measures that enable close monitoring of operations and that lead to effective TP functions.
This requires firms to do a thorough analysis of their operations, industry, and business models to determine the best suite of measures to apply.
Wierzejski stresses the need for KPIs to be fit for purpose and updated regularly.
“They [KPIs] must reflect the company, industry, and the time when they are measured,” he says, adding that KPIs introduced 10 or even three years ago might already be out of date.
Tracee Fultz, global TP leader at EY in New York, says that businesses must set processes to monitor, adjust and ultimately invoice the inter-company prices to meet their TP policies.
She says that until recently, most KPIs were focused on fulfilling previously established financial procedures.
This has shifted to c-level executives now focusing their attention on performance measures that encourage automation and standardisation of the entire inter-company process, she adds.
“Innovation and automation of operational TP, including the use of artificial intelligence, is one of the fastest areas of tax automation,” she says.
This allows for more in-depth analytics around price setting and legal entity forecasting – a form of strategic forecasting that values entities and their underlying assets.
Difference and disconnect
There are numerous benefits to aligning KPIs with robust TP policies. These include a more effective workforce, greater staff motivation and better results.
But there remains a disconnect between performance measures and inter-company pricing procedures in most companies.
“KPIs and TP policies are not that connected as they should be in a lot of companies,” says Wierzejski.
He says TP policies ultimately determine what types of KPIs are established by the TP function.
This a view shared by another tax expert.
Benoît Labiau, EMEA head of tax and treasury at medical device company Terumo Europe in Brussels, notes that KPIs are largely a function of the TP policies adopted by the business.
“The KPIs used are quite different [from business to business] depending on the particularities of each group and the nature of the transactions,” he adds.
Bridging the divide
There are several adjustments to the structure of the TP team that can be made to increase its effectiveness. These could include splitting TP into two distinct teams, one that deals with operations and another that is focused on business partnerships within the organisation.
Esteves says that business partnerships teams should aim to establish joint-KPIs with the broader business to show the cashflow benefits that TP policies can bring to the company.
She says this has the potential to change the way the tax team is perceived in the firm, from a reactive to a proactive function.
“You go from fire drill mode where you are brought in after things are done to working more as a partner team that has a seat at the table when decisions are being made,” she says.
This also means that TP teams can be consulted when the business is setting up projects such as greenfield production sites, new supply chains, or expanding into overseas markets, she adds.
“Then you get a chance to influence things, and the way to get there is by having KPIs that show the value that tax can bring to the table,” she says.
Pros and cons
Businesses value the use of measures that make the running and maintenance of operations more cost effective.
“For compliance and operations, we usually use a second KPI that measures the percentage of on-time filings,” says Esteves.
She highlights that the underlying benefit is the value of potential penalty fees saved owing to timely submissions.
However, not everyone is convinced of the benefits of using KPIs.
Esteves notes that there is a significant portion of the tax community that still sees performance measures as a form of micromanagement.
She says that there is sometimes a disconnect between the approaches taken by new recruits and what is required in-house.
“They have been trained with a certain mentality and [different] KPIs; something that takes time to adjust to,” she explains.
Esteves also points out that tax teams seem to be moving to more project-based roles with its own KPIs. Yet, the focus for tax areas such as litigation or audit is on implementing good control measures to detect potential tax risks early.
These include performance measures around the timely delivery of projects or questions made by tax authorities or on delivery of processes.
There are important control measures that businesses can adopt to ensure they mitigate audit risks and the magnitude of adjustments.
TP teams could use control mechanisms to improve operational efficiencies. These might include both formal and informal check-ins with external teams to ensure that projects are on track.
Operational TP teams might look to schedule catch-ups periodically to check in on TP setting and year-end adjustments.
“A tax control framework allows the tax function to manage operational risks. Soft controls, structured around regular and transparent communication with non-tax functions, enable the TP functions to stay informed about what the business is doing,” says Esteves. “These types of controls allow you to prevent future risks disputes, for example.”
As tax functions and TP take on a more cross-functional role, tax leaders need to embrace KPIs and control measures to boost overall business success and reduce the risks of audit disputes.
If they can, they might just land TP and the broader tax functions a permanent seat at the decision-making table.