Where and how income will be taxed is an increasingly complex problem for multinational corporations, and one that falls squarely in the lap of the CFO and VPs of tax. New OECD BEPS (base erosion and profit shifting) tax reforms and increased enforcement worldwide have brought operational transfer pricing front and center as a process to manage cross-border taxation exposure – and identify and mitigate costs. Global supply chains are vast and complex inter-company economies often invisible to CFOs, and they represent a major source of hidden operating and tax costs if not well managed.
Supply chain taxation issues and sustainable technological solutions were the focus of a September 28 webinar, Shining a Light on Hidden Supply Chain Costs and Tax Exposure, co-sponsored by Deloitte and SAP. The webinar featured three presenters with extensive client-based experience in cross-border finance, taxation, and regulations:
- Bob Norton, specialist leader with Deloitte Tax LLP
- Mitch Morris, managing director with Deloitte Consulting LLP
- Kirk Anderson, vice president, Analytics Product Management, SAP
Operational transfer pricing and supply chain taxation
The webinar focused on how process improvements can reduce ongoing operating costs and financial reporting risk, support global tax planning, and streamline inter-company accounting and operational transfer pricing (OTP). The speakers began by explaining OTP, a process for which multinationals are seeking scaleable and sustainable solutions across their supply chains. Mitch Morris defined OTP as the “systems and processes for transacting, controlling, and determining that all inter-company transactions and related accounting adhere to the company’s transfer-pricing policies.”
Added Bob Norton, “OTP is the connective tissue across people and processes.” However, he emphasized that organizations face an array of challenges as they strive to implement a consistent OTP process, which requires, for example:
- Profitability analysis across legal entities and functions within those legal entities throughout the global supply chain
- Uniformly automating cost allocations
- Accessing both transactional and master data to comply with each country’s transfer-pricing reporting requirements, including new country-by-country reporting mandates
- Consistent external country-by-country reporting
In addition, CFOs may need to deal with effective tax-rate volatility that can impact quarterly and annual earnings, as well as potential scrutiny by external auditors due to large year-end transfer-pricing adjustments. All of this drives the need to “capture, allocate, and monitor transfer prices” across entities and across borders. And the new country-by-country reporting requirements may necessitate changing business models for compliance, further complicating the OTP pricing process.
Simplifying OTP and reducing risk
OTP is not a new concept. However, before the availability of current technology, it was typically managed via large, complex spreadsheets – so large they were crashing under the weight of growth in the volume and complexity of intercompany transactions. Kirk Anderson discussed in detail how much of the end-to-end OTP process can be automated via SAP’s “digital core” by shifting the process upstream to the source transactional system.
He highlighted “how the digital core solves the multifaceted OTP puzzle” by mitigating risk, facilitating reporting, and offering real-time options to address both problems and opportunities. Kirk and Mitch explained how digitizing the OTP process can make life easier for finance and tax teams. For example, a universal journal removes time-intensive manual reconciliation, replaced by a single source of truth for all financial data, integrated for global collaboration across tax, finance, and supply chain. This approach enables allocation of centralized costs across the business, and seamless integration of actuals and planning in the same system. Management can gain insight into what is actually happening across the business, not just by company and account, but by legal entity, function, and product, with real-time monitoring.
The fact is that using spreadsheet tools for managing intercompany accounting and transfer-pricing monitoring falls short of contemporary demands and creates an unacceptable level of risk. With new technology and a digital core, Mitch added, “We now have a predictive model and can run ‘what-if’ scenarios to reorient how we move goods and services across borders.”