Is digitalized transfer pricing documentation infallible?
Brigitte Baumgartner Garcia — Aibidia Digital Transfer Pricing Advisor
Due to its very particular processes, the area of transfer pricing is suitable and ready for digitalization. In general, the finance and tax function encompasses many processes that can be part of this new 4.0 era. Digitalization impacts three different levels: products and services, procedures and decisions, and new digital business models.
The first of these, the digitalization of products and services, can be experienced in many different areas. For example, items may now equipped with sensors and actuators, the kind of digitalization that be seen in many home appliances. The second level represents the automation of processes and decisions. Industry 4.0, means “networking of autonomous, self-controlling, self-configuring, knowledge-based, sensor-assisted, and spatially distributed production resources, including their planning and control systems” (Kagermann, 2013). All processes will go through a digitalization transformation, and transfer pricing is no exception. The third level is developing new digital business models essentially derived from the first two first levels.
Transfer pricing professionals and tax experts are focusing their efforts on the second level of digitalization. We are asking ourselves daily how we can improve our processes while still having a policy and producing documentation that is bulletproof in the event of an audit.
Conceptually, there is no reason why digitally prepared TP documentation could not be as good as, or perhaps even better, than that prepared manually. However, you need to make sure that any documentation produced is:
- Reliable in its contents and contains harmonized information
- Easy for the auditor to read and understand
- Aligned with your IC — Agreements
- Aligned with Benchmarks
It is important to make sure that the tool or platform you are using provides you with an editable result. You are not dependent on consultants’ schedule to deliver your documentation but can still use them for advice or even invite them to collaborate on the platform and comment on your data. This method gives you full control over the information and processes: Your documentation, your timing! By using a digitalizated product, your content in turn becomes more reliable, with one source of truth in the platform. This is a significant advantage from outsourcing documentation with different providers or consultants worldwide.
Also ensure that the transformed information is concise and structured in the right way for the reader to quickly understand your policies, transactions, and arm’s length results.
One of the daily problems encountered by transfer pricing practitioners is maintaining harmonization between agreement amendments and documentation. Although there is no perfect world, you can at least have all your relevant documents saved in one place. This simple function will help you gain control and better understand the history of the transactions and for example support your functional and risk analysis.
Similar to the Agreements, the alignment of Benchmarks is not only costly but also burdensome. Your product should be able to track the profit level results of your transactions and suggest year-end adjustments.
The function of transfer pricing professionals should add value to the business. Generating thousands of pages of compliance documentation per year does not as such add value to the company, it only develops costs. Our role is to take care of compliance in a smart and affordable way, bring value through analysis of tax policies, and avoid double taxation. Finally, whereas TP compliance has historically only been a cost, now with a digital transfer pricing tool equipped with proper analytics you can realise
insightful information that truly benefits your business as well.
Kagermann, H.,Wahlster, W. and Helbig, J. (2013), “Umsetzungsempfehlungen für das zukunftprojekt industrie 4.0“, Abschlussbericht des Arbeitskreises Industrie, 4,p.5.