Effectively Integrating Tax and Transfer Pricing Requirements with Enterprise Resource Planning

Effectively Integrating Tax and Transfer Pricing Requirements with Enterprise Resource Planning

by David A. Nickson, Andrew J. Hwang and Elizabeth A. Sweigart *

As multinational enterprises continue to expand through acquisition and organic growth, the need for accurate and timely reporting of operational and financial data has never been more critical. Companies rely on their management information systems to deliver reports that enable corporate executives to make informed decisions in real time. However, rapid expansion — particularly through acquisition — can result in companies having a plethora of accounting, supply chain, human resources, and other systems and software platforms that often cannot be integrated easily.

These systems gaps result in poor management reporting and are of even greater concern for multinational enterprises with a high volume of intercompany transactions. The ability to accurately price, record, and report transfers of tangible goods, licenses or sales of intellectual property, and the provision of services and financing between related parties — or transfer pricing — is critical to correct and timely tax reporting domestically and abroad. Poor tracking of transfer prices translates to increased enterprise risk and a possible impact to the bottom line.

Corporate executives within multinational businesses must work cross-functionally — bridging operational, financial, and information management systems — to integrate tax and transfer pricing requirements into their enterprise resource planning (ERP) systems.

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Related parties engage in activities ranging from the sale of tangible goods and licensing or sale of tangible property to the provision of services and extension of financing. Appropriately structuring ERP systems to correctly execute these transactions and account for the layers of complexity caused by varying tax and transfer pricing rules is essential to mitigate enterprise risk. Core operational transactions tend to lend themselves to automated pricing mechanisms within a system while other types of transactions — particularly services and financing — most often rely on manual processes to calculate transfer prices. Often based on a desktop spreadsheet, these manual intercompany journal entries are not always subject to rigorous controls.

Typically, transfer pricing is integrated into ERP systems either through master price tables reflecting a fixed rate per SKU or as a function of a cost base, such as cost plus a set mark-up. However, this approach can create a conflict with the transfer pricing policy. For example, in the case of fixed prices, reliable forecast data may not be available to provide for an accurate estimate. With respect to a cost plus approach, operating expense forecast variances might not always be factored into the mark-up. Both of these scenarios, if improperly handled, may result in discrepancies that must be reconciled. In some instances, the transfer pricing approach integrated into the ERP system is at odds with the company's policies. For instance, many consumer goods businesses rely on a so-called resale minus approach where the transfer price is derived from end customer price minus a specified margin to the distribution company. If the ERP system is only configured to execute a cost plus or fixed SKU-level price, a mismatch will result.

For many organizations, particularly those with significant tangible goods sales, managing the sheer number of different transfer prices — in some cases every SKU will have a different intercompany price — is critical. It is often the case that fixed SKU price tables and cost plus profit margins are updated infrequently and do not reflect changes in business forecasts or even comparable company benchmarks. To avoid potentially large true-up adjustments, companies are best advised to review and update their pricing mechanisms quarterly or more often, if market conditions require it.

However, it is not sufficient simply to record the correct transfer price for income tax purposes; companies must be able to capture and report the ancillary consequences as well, including the ways in which indirect taxes may come into play, and program their ERP system protocols accordingly...

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RELATED LINKS: For information about reportable transactions and transfer pricing, see:

David A. Nickson, Andrew J. Hwang,and Elizabeth A. Sweigart are with PricewaterhouseCoopers LLP. David, a Principal, has two decades of tax and financing transactional experience, most recently advising clients on the end-to-end (E2E) accounting execution of transfer pricing and value chain planning. Andrew, a Managing Director, is a member of PwC's Value Chain Transformation (VCT) Technology and E2E Transfer Pricing Execution practice with a particular focus on technology transformation and enablement. Liz, a Director, has over a decade of transfer pricing, tax controversy, and project management experience.

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.