Managing the Transfer Pricing Lifecycle

Managing the TP LifecycleJuan Carlos Ceballos and Kay Freund

Table of Contents :

1. Overview

2. Planning

3. Implementation

4. Compliance

5. Audit Defense

6. Appendices

3

4

8

10

14

18

TP Lifecycle Overview

Implementation

Planning Compliance

Audit Defense

Design and Implement

People substance in same location as profits?Is tax structuring aligned with economic reality?Are business changes in sync with TP system?

Document

Are intercompany agreements reflecting transactions executed?Key data fully reconciled?Robust functional analysis available? Perhaps for defending profit splits

Analyze

Are value drivers, IP and business models fully evaluated and documented?

Protect

What TP issues are being audited/negotiated abroad?

Are court case decisions potentially affecting existing or past tax positions?

Planning� Operational planning vs. tax planning � Ensuring that policies align with the realities of the business � Common errors in not putting policy and tax planning into

practice include: lack of systems, processes, sufficient resources and commitment from key stakeholders

� Tax is integrated into the various business segments/divisions and organization functions and is aware of change before it happens

Functions Involved / Impacted by TP

� Corporate Tax� Consolidation Finance� External Reporting� Business & Geography

o Financeo Operationso R&Do Marketing

� Internal Audit� Legal� Import / Export Control� Supply Chain� Regulatory & Reimbursement� Business Development

Within the Company � External Consultants

o CPA Firmso Legal Firms

� Statutory Auditor� Taxing Authorities

o Income Taxo Customs

� Industry & Trade Groups� Professional Organizations

Outside the Company

Planning Best Practices

Problem

Tax becomes aware late in the game when significant supply chain changes may occur

Solution

Request access to recurrent group meetings company changes are discussed. This includes meetings lead by the FP&A, supply chain, manufacturing and IT teams. Scout changes within the company’s intranet. Develop strong and mutually beneficial relationships across the organization.

Problem

Groups/functions do NOT know or care much about “legal entities”

Solution

Establish strong working relationships with other finance groups that care about legal entity reporting (i.e. consolidations) as well local finance leaders. Stay on top of invoice flows, division / function / BU organizational changes and key acronyms .

Implementation� Applying TP planning to operations� Collaboration among finance and business � Ensuring proper implementation, e.g. differing GAAPs, FX risk,

tax and accounting gaps, etc.. � Maximizing the use of people, processes and technology e.g.

centers of excellence� Trust but verify ERP, cost center data, etc.� Intercompany agreements � Managing customs, VAT, tax reserve implications

Implementation Best Practices

Problem

Evolving organizational structure triggers revenue and cost center data changes affecting certain intercompany royalties and expense allocations

Solution

Stay on top of organizational changes andcontinuously communicate specific data needs to FP&A and other groups. Critically analyze data

Problem

Does the Tax Planning group operate in a separate “silo” from the implementation, compliance and defense groups?

Solution

Break down “silos” by creating an environment of open sharing of information between groups to ensure that the entire life cycle of transfer pricing is addressed during the planning stage

Compliance� Policy/agreements vs. actuals� Consistency is the new name of the game

- Reconciling data with local tax returns � Master and local studies: to outsource or not?� Functional and Industry analyses � What’s your story ? Is it cohesive?� Rejection of transactional methods� Regional vs. local comps

Compliance Best Practices

Problem

The corporate TP function lacks sufficient headcount to fully comply with all local TP requirements centrally

Solution

Obtain regional controller’s approval to have TP issues formally included in local finance director’s responsibilities. Offer unlimited training, support and guidance. Review technical analysis and documentation for global consistency purposes

Problem

Tracking and validated data for TP review purposes is not automated or optimized

Solution

Obtain a dedicated IT professional and develop standard operating procedures for tracking and reviewing key data consistently across the organization. Ensure all users have the appropriate access and training to download the data on their own

Intercompany Pricing Adjustments(For Tangible Transactions)

a) Prospective Transfer Price Changes (Re-Pricing)

List Price or ASP minus a discount

Cost Plus Markups

StaticTP Lists

b) Retroactive TP Adjustments

Key Considerations: Fin data source, processes, projected data, segmented results and deadlines

Objective: Aim at year end

legal entity profits that are within a

range of third party comparable

(i.e. “arm’s length”) profits

Quarter

Year –E

nd or as necessary

Monitored

every:

Yeah, we’re done with

year end work!

Here you go…

Audit Defense� Getting to know your audit team � Develop an audit defense strategy � Plant tours and interviews with business/operating personnel � Responding to queries� When to settle and when to push to appeals � When APAs may not be a good idea

Audit Defense Best Practices

Problem

Non tax personnel (e.g. controllers) are usually appointed as tax audit liaisons

Solution

Provide sufficient basic knowledge how to handle a tax audit (i.e. What to say and what not offer) while evaluating corporate office involvement based on perceived tax risk

Problem

Audit defense is led by local tax advisor with limited knowledge and history of the TP issues at stake

Solution

Define role and responsibilities upfront. Share with the local advisor as much insight on the company’s TP policy, practices and successful audit strategies.

Country-by-Country Reporting Threats

This is what we have provided so fare.g. local TP results

Intended Risk Assessment?

Would filings lead to endless inquiries?

How to ensure data will be used for risk assessment and not disclosed publicly?

Should taxpayer prepare an explanatorysupplement?

Conclusions

� Break down silos to better manage the TP lifecycle

� Partner with internal and external resources to get things done

� Maximize use of TP systems, processes and automation

� Anticipate and adapt to change … a lot of change

Appendices

Year End Checklist

• YoY reports• Tested entity’s 3yr PLI rolling averages• TP adjustment entry backup• TP adjustment summary for VAT and Customs• Pre and Post TPA P&Ls/models• Yearly calendar of recurrent key activities (tax + not tax)

TP Audit Checklist

• Basic company presentation w/overview of TP system• Information and data request control sheet• Tax authority interview “Dos and Don’ts” for non-tax

personnel

TP Compliance Checklist

• Invoice and physical movement flow charts • Global TP documentation control sheet • Keep good track of historic TP changes• Prepare multiple documents to educate internal TP users

and address repetitive questions from non-tax personnel• Consider saving in a central place any important internal

TP practice changes and decisions (not in emails)• Regularly backup emails (if not done automatically)

Basic instructions for creating segmented profit and loss statements

(“P&Ls”) for transfer pricing purposes

1. Based on data availability, identify the segments (e.g. distribution, manufacturing, contract manufacturing, etc.) that need to be broken out from the P&L based on source

2. These segments can each be further broken down in intercompany and trade 3. Allocate from ERP system sales and cost data corresponding to each segment compiling a

high level P&L by segment 4. Allocate other costs of sales and operating expenses based on a reasonable basis. For

example: – Some costs of sales, variances and freight can be allocated entirely depending to which segment it

relates– Other costs of goods sold could be apportion among all manufacturing segments base on costs of

sales– Intercompany profit mark-up could be allocated by segment/source– Sales and marketing expenses are typically allocated based on trade segment revenue– Administrative expenses or other overhead costs could be allocated on relative revenue– Depreciation, restructuring costs and onetime expenses should be typically excluded from the

operating margin calculation 5. Reclassify non-operating income items to specific segments, if reasonable for transfer

pricing purposes. 6. Calculate the profit metric required for each segment7. Reconcile segment data with P&L information

Common pain points of in-house

TP professionalso 3 out of 4 tax professionals lack resources to manage tax risko Implementation routinely underestimatedo The Tax function is sometimes perceived as a cost center that adds

little valueo Some country regulations may trigger inconsistencies o Limited data to track system profitso TP talent management