New Technologies Driving Value In FP&A And Tax

Andrew Hwang and Rob Jenkins

With tax and trade policy in the daily news, finance leaders seek to ensure compliance with new rules and regulations while continuing to optimize the global value chain. Given the recent tax changes in the United States, there are significant opportunities to create competitive advantage through more robust and dynamic planning and modeling. The new technologies in planning and analytics can provide more integrated, streamlined solutions for finance and tax teams to address these opportunities.

Changing needs for planning and analysis

In managing the value chain and profitability across jurisdictions, intercompany design and execution are immensely critical. Finance and tax teams must work together to plan and execute detailed intercompany transfer pricing involving both tangible goods prices as well as non-tangible payments, such as royalties, commissions, financing transactions, or HQ/shared service charges. They must be able to proactively plan and monitor any changes to the intercompany transactions and their impact on the value chain and profitability – whether due to business conditions or new regulations.

Traditional ways of addressing planning and compliance with transfer pricing are disconnected and fraught with challenges. There is often a lack of consistent process, technology, and governance across financial planning and analysis (FP&A), controllership, and tax. Many finance and IT teams are likely familiar with enterprise resource planning (ERP) systems that execute intercompany transfer prices as part of the system of record. Likewise, FP&A teams are likely using FP&A or business intelligence (BI) applications to facilitate the budgeting and forecasting process. However, the tax department is typically isolated from these finance processes, relegated to using spreadsheets and email for value chain modeling, transfer pricing monitoring, and documentation.

As finance leaders search for enabling technology to help with value chain modeling, they are looking into the latest trends in planning and analysis applications. What was once considered the enterprise or corporate performance management (EPM) space is now combining with BI tools to comprise a new wave of analytics applications. These are now much better positioned to address key intercompany and tax processes such as:

  • Management vs. legal-entity forecasting
  • Intercompany trade-flow modeling, intercompany price, or discount setting
  • Management vs. statutory cost allocation
  • Jurisdictional profit monitoring
  • Intercompany transfer-pricing adjustments
  • Journal-entry automation

The new wave of analytics applications may come under a wide array of categories such as integrated business planning, financial planning, profitability modeling, consolidation, disclosure, etc. The analytics application categories are further complicated by the trend toward cloud-based (vs. on-premises) platforms. No matter what they are called, there are certain criteria to consider in evaluating analytics applications for transfer pricing and tax modeling.

Five criteria to consider when evaluating applications

Complexity: Intercompany design and execution involve complex data-management, allocation, and calculation rules, including using various transfer-pricing methods across hundreds or thousands of products by legal entity by country. These rule sets must be executed in a system that is developed with tax-modeling characteristics in mind, such as scenario planning/simulation, driver-based assignments, multi-step attributions, and a high degree of many-to-many relationships.

Scalability: A large volume of data can increase calculation cycle time; hence, it is critical to factor in database technology and system performance. Tax and finance teams seeking to calculate pre-tax profitability by SKU or product by legal entity can end up with millions of records across various costing and reporting dimensions. This data might also require alternative hierarchies separate and distinct from financial accounting, adding intensity to the calculations.

Traceability: Understanding how costs flow through intercompany transactions is a critical requirement for tax compliance and local statutory purposes, as well as for group consolidation/elimination. Traceability needs also include the ability to audit the output data and determine who made changes to what (and when) so as to maintain data integrity and assure management of proper controls.

Interoperability: Interoperability is key, since transfer pricing and tax use cases commonly involve integrating operational transaction or summary data with financial accounting results and tax calculations for purposes of cost allocation. This operational data is sourced from outside the general ledger. The planning and analysis system must be able to incorporate outside data with minimal IT investment.

User experience: To maximize agility, business users need to be able to manage the system with little to no IT involvement. The analyst team will gain immense insight from scenario modeling. And if the tax team needs to rely on IT to make changes to logic or input parameters to run a scenario, many fewer simulations will be possible, and strategic advantage will be sacrificed. Usability also includes self-service reporting where analysts can drag and drop to create their own views of the information to meet the needs of the business.

Optimize operations while ensuring compliance

The latest planning and analysis applications are ideally suited as modeling and reporting platforms for finance and tax professionals to automate, analyze, and document intercompany transactions. This approach is critical to providing business leadership the visibility they require to optimize operations across jurisdictions while also ensuring compliance with the latest wave of rules and regulations. Navigating the ever-changing maze of application categories and terminology is challenging. But when the stakeholders are engaged to identify process opportunities and the right technology is in place, in our experience, the result will be a substantial increase in ROI.

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Andrew Hwang

About Andrew Hwang

Andrew Hwang is a managing director in PwC’s Global Transfer Pricing practice, and leads the technology services for the Intercompany Design & Execution practice. Andrew has 20+ years of tax management consulting experience, working with tax, transfer pricing, finance, business, and IT functions of Fortune 500 companies to better manage financial and tax risks, enhance modelling and planning capability, and improve the operational efficiency of the tax departments.

Rob Jenkins

About Rob Jenkins

Rob Jenkins is a finance executive with over 20 years of experience in leading high-technology and professional services companies. At SAP, he consults with CFOs on technology, analytics, and performance management. Rob has served as vice president, Corporate Finance and led finance transformation. His leadership experience also includes corporate development, M&A, strategic planning, and consulting. He has designed and implemented customer profitability, business planning, process improvement, and performance measurement systems in multiple organizations. Rob began his career as an auditor with a Big 4 CPA firm. He holds an M.S. in Accounting and is a CPA, CMA, and CFM.