Preparing for pillar two: why automating OTP should be at the top of your to-do list
With transfer pricing complexities set to increase in 2023, Rahila Zahin of ARKK explains how automating processes can help.
If you are a transfer pricing expert, there is no doubt your to-do list is a lengthy one.
In recent years, the compounding factors of global tax reform, shifting supply chains, increased enforcement, and digital tax transformation have made transfer pricing overwhelming, to say the least. And for tax professionals at multinational enterprises, the global tax landscape is about to get even more complex.
The introduction of pillar two, a transformative tax system that will apply with uniform effect worldwide, is set to take effect in 2023. These rules ensure a coordinated system of taxation that imposes a top-up tax on profits arising in a jurisdiction whenever the effective tax rate (ETR), determined on a jurisdictional basis, is below the minimum rate.
To endure the implications of pillar two and thrive long term, forward-thinking tax teams are making operational transfer pricing (OTP) automation a top priority. Why? Because complying with the impending legislation will be unmanageable without it.
Pillar two implications for MNEs
Pillar two sets out global minimum tax rules (known as GloBE) to ensure that large MNEs pay a minimum ETR of 15% on profits in all countries. From 2023, pillar two’s ‘income inclusion rule’ will apply to large multinational businesses with consolidated group revenues of at least €750 million ($781 million) per year.
To comply, transfer pricing experts must enable proactive planning and decision-making capabilities in ways they have not before. It now becomes critical for organisations to review their business operations and transfer pricing policies more consistently and adjust as needed.
With pillar two potentially affecting incentives regarding the location of profits and investments, MNEs must plan ahead. By modelling the potential tax impacts and quantifying the effects throughout the year, organisations can avoid the customs and corporate tax audits that may result when only making adjustments at year end.
So, where do tax departments begin? The foundation for complying with pillar two lies in the automation of OTP processes. And while change is a challenge even in the best of times, the opportunity cost of forgoing OTP automation is too high amid such a fast-moving global tax landscape.
Are MNEs ready for pillar two?
In recent polls, tax professionals attending industry conferences in 2022 overwhelmingly state they are interested in automating OTP processes, but few are willing to ‘cross the bridge’ first.
During the TP Minds International event that took place in London in June, participants were asked how they would describe the level of technology/automation within their transfer pricing function. With a few votes for some level of automation, 74% said it was minimal and most of their process was manual, involving spreadsheets. This sentiment was echoed at the ITR Global Transfer Pricing Forum in September, where 69% of participants polled said they address OTP with manual processes in Excel.
For many tax departments, transfer pricing activities are still very much compartmentalised. From planning to operationalisation, to documentation to controversy, much of this work is done in silos.
On top of that, reliance on manual processes, multiple spreadsheets, and other disparate sources of data often results in a lack of integration with other functional areas, such as finance, treasury, and supply chain. With pillar two looming, tax departments must take decisive action to address these inadequacies.
There is also a hidden and large cost inherent in relying on in-house solutions. IT departments do not have the expertise and cross-industry knowledge that an established OTP software provider does. So, while an in-house solution could help to address pillar two in the short term, the time is better spent on direct business improvements and/or tax optimisation to improve the ETR. Let an established OTP automation software provider put its knowledge and best practices to work for you so you can hit the ground running.
Laying the foundation for OTP automation
When it comes to OTP automation, there is a misconception that tax departments must tackle every single piece of transfer pricing in one go, but you do not have to fix everything at once. Why not start with OTP and make two days easier per month? If there is a common platform to unify calculations and policy, then why not start here, today? This includes policy tracking, as there is a much better way to see how policies are reflected in transactions.
Transfer pricing is not challenging mathematically; it is the volume of data and management that makes work complicated. This can easily be solved through the use of a common platform, audit trails, and a controlled workflow, and taking steps to ensure all checks and standards are completed consistently across teams and jurisdictions.
Flexible technology is available and can be adjusted for pillar two as it commences. Automation makes the OTP process transparent and ensures that data points already exist when pillar two is rolled out. That way, it is simply a matter of adjusting in accordance with future legislation, instead of starting a process from scratch. By automating OTP processes now, you will lighten your present burden, improve quality across all intercompany transfer pricing processes, and set up your tax team for future compliance.
In the UK, we are not sure how and when pillar two legislation will take shape, but OTP automation ensures your tax department is ready when it does.
Crossing the bridge with a trusted partner
In preparation for pillar two, the bottom line is this: for organisations that have not yet prioritised the automation of OTP processes, the time is now.
Shifting government policies and a heightened emphasis on enforcement are bearing down on the transfer pricing function in very real and immediate ways. Acting now ensures that OTP processes are responsive and resilient in the face of uncertainty, and that your organisation is in a strong position to manage controversy as it arises.
ARKK provides the OTP alternative by improving accuracy, reducing risk, and increasing transparency. Codifying your transfer pricing policy into an automated OTP process gets tax right, in time, every time.
With a platform that is fully configurable, flexible, and agnostic, ARKK allows for data input from any source system. And it is compatible with Excel, so you can keep using the system you know with the improved controls and visibility of an artificial intelligence platform. Designed for collaboration with unlimited users, ARKK offers complete visibility of tasks and instant insights that enable smarter decision making.
Ready to cross the bridge with ARKK? Learn more.