Outpace Transfer Pricing Disruption With These 3 Steps
Governments have set their sights on multinational enterprises and their murky accounting operations. Along with environmental, social, and governance (ESG) standards—which have spurred a corporate-accountability renaissance—transfer pricing is shifting organizational culture at its core. Now with statutory financial reporting and ESG intertwined, and a broadened stakeholder group, pressure on transfer pricing defensibility is increasing.
To keep pace, automating transfer pricing accounting is the right strategy to help organizations adapt to regulatory shifts, public scrutiny, and uncertainty in the wings.
The regulatory vice is tightening
Cryptic organizational accounting practices have been precipitating banner regulatory changes since the early aughts. The Enron Corporation et al. scandals led to the Sarbanes-Oxley Act (SOX) of 2002. In a less-flashy event, the Financial Accounting Standards Board (FASB) introduced FIN48 in 2006 to close in on suspicious tax positions in financial statements. The General Data Protection Regulation (GDPR), drafted by the European Union, made a splash in 2018 as it tightened data privacy laws and overhauled organizations’ use of personal data. The headline-seizing ESG drive has pushed companies to make disclosures in either an annual or a standalone sustainability report. Alternatively, firms have made disclosures in a self-defined corporate responsibility report, such as publicly available responsible tax narratives.
Meanwhile, the Organisation for Economic Co-operation and Development (OECD) has been modifying international tax policy since 2013 with the Base Erosion Profit Shifting (BEPS) initiative enacted to button up profit-shifting tax treatments. Most recently, the BEPS Pillar 2.0 and the G7 introduction of a minimum corporate tax rate are further transforming traditional tax structures.
Current reporting structures lack cohesiveness
Despite this rise in pressure, conventional reporting models continue to be a headwind against managing audit risk. The record to report (R2R) cycle is still largely fragmented since filings are prepared and submitted in local jurisdictions, and subject to in-country legislation and localized services. Similarly, matrixed business models—such as shared services centers (SSCs) and global business services (GBS) teams—present the same challenges. Corporate headquarters teams, thus, have limited visibility into jurisdictional filings.
Also, many global firms are still using manual protocols for their R2R process, pulling scattered data from decentralized ERP systems, exposing them to risk for error. Maintaining data integrity in a single, transparent environment reduces risk for error and eases reconciliation across different accounting standards—namely, the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) Foundation.
Transfer pricing must also pass various customs duties and value-added tax assessments. Additionally, transfer pricing adjustments are often material and timely to the year-end tax provision, contributing to uncertain reserves and delays if last-minute changes are manually recorded.
Tackling transfer pricing challenges in the cloud
It may be no surprise these drawbacks and the pandemic’s long shadow have prodded 25 percent of organizations to fast track the adoption of cloud technologies for legal entity reporting this past year. Meanwhile, many multinationals experienced reporting cost increases during the same timeframe. For finance teams to remain compliant with minimal audit risk and optimal audit defensibility, they should rethink how their resources are being spread out and consider the cloud’s advantages.
The following three steps introduce what cloud enablement can offer and actions needed to successfully ramp up an automation program.
1. Create data lineage and consistency through cloud-based reporting
Digital-first finance teams that were connected to the cloud prior to the pandemic’s outset experienced minimal disruption versus those that were still using on-site technology. Legacy reporting frameworks are often too rigid and inflexible to scale easily, thereby making it difficult for organizations to quickly pivot to regulatory adjustments. However, the cloud has the fluidity to be integrated across your entire reporting continuum regardless of geographic boundaries, protecting your company from local or international tax structure disruptions.
With a cloud-based auditable environment, teams can work across local controllerships with a single source of truth for entity files, policies, calculations, and more, as data is tracked to your source documents and user changes are recorded across your reporting. You can respond to audits with more confidence knowing you have a clean audit trail.
Also, with time saved from automating data acquisition and data entry processes, more resources can focus on business planning analysis to keep pace with geopolitical or regulatory reform.
Need more proof? We've seen enterprises that achieved cloud automation experience 30 to 40 percent efficiency gains within the first year alone, and a strong in-year return on investment.
2. Establish a sight line toward scalability
Implementing a cloud solution into your reporting is a complex process. Start by conducting an end-to-end system audit for automation opportunities, and prioritize reporting hierarchies that could benefit the most. However, don't launch a pilot program without first developing a blueprint that can enable automation at scale, as this could lead to implementation dead ends.
After automation is achieved within one reporting cycle, phase integration when you have the capabilities. The final evolution is a complete platform as a service (PaaS) cloud-based ecosystem where your reporting pipelines are tethered to the cloud, ensuring transparency, consistency, and standardization in your transfer pricing reporting.
3. Gain buy-in by selling the big picture
Running a pilot study within a vacuum doesn’t set your transfer pricing team up for success. To avoid a project disconnected from the realities of the organization, you need committed leadership or a center of excellence (CoE) to support adoption and implementation.
Companies tend to underestimate the time needed to generate financial reports and are surprised by the workload required to complete them. With the stress and bandwidth gaps in completing filings, manually tracking, consolidating, and collecting data invites risk into your reporting. Explain to your CoE and teams the benefits of global connectivity and centralized and uniform reporting, as well as the time returned toward value-added tasks.
One slip is all it takes to derail your organization’s reputation. Syncing your transfer pricing data to a cloud-based solution promotes real-time collaboration, data integrity, and improved time-to-report. Peace of mind while managing many moving parts is invaluable, so the right solution can satisfy the need for truth in your numbers and confidence in your reports.
SSON conducted a survey of 120 multinational companies to understand where they see their statutory reporting processes heading over the next 12-18...