Tax and Technology: An unusual partnership

In all likelihood, multi-national enterprises (MNE’s) are going to face a number of challenges in the area of transfer pricing reporting and execution. MNE’s need to start embracing technological solutions available to support them in transfer pricing execution.

Background

It is unusual to talk about tax and technology together in the same context, but with the growing challenges that many large multinational companies face, this partnership is becoming more of a necessity. Within transfer pricing, MNE’s already face many challenges in intercompany execution due to their complex operating structures. Compounding these existing challenges, the new reporting requirement of Country by Country reporting (CbCr) under the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) has put significant pressure on MNE’s to provide timely and accurate financial data.

To meet these additional data and transparency challenges, companies are increasingly looking at the capabilities of their information technology (IT) systems to make the process of collecting, calculating, analysing, and reporting transfer pricing data more efficient and productive. Historically, this domain has been held with controlling and accounting departments and IT departments in MNE’s who have designed their enterprise resource planning (ERP) systems based on their financial reporting requirements. Corporate Tax departments are usually advisors within their organisations and are not usually consulted when designing a robust ERP system, as a result, ERP systems may not be optimised for transfer pricing execution requirements in their financial reporting processes and procedures.

In the past few years, most MNE’s have struggled due to an increased focus on transfer pricing from tax authorities around the world, some of the reasons may have been due to the fact that their ERP systems do not support transfer pricing execution. However, this increased focus was still not sufficient for MNE’s to focus on ERP systems for transfer pricing execution as manual ‘quick fix’ solutions using spreadsheets were considered as a satisfactory and a cheaper alternative. MNE’s need to start realising that the larger risk lies in non-compliance of transfer pricing execution than on data collection for reporting compliance purposes.

Why now?

So why are we talking so much about technology now? The OECD’s tax transparency initiative has made it mandatory for large MNE’s to disclose Country by Country reports by the end of 2016 for most countries. This has been a wake-up call for many MNE’s as this comes as a huge administrative burden for them. Never before has there been so much focus on tax and with a wide range of stakeholders focussing on it other than tax authorities. Tax functions of large MNE’s need to look at this from an opportunity point of view where they can not only collect the information necessary for CbCr reporting but also for streamlining transfer pricing execution, which is where the larger risk lies. This would require them to embrace technology solutions in their area and work together with controlling, accounting and IT departments. It seems logical to start with this sooner than later when mandatory requirements kick in and MNE’s might be caught unprepared. An apt Swedish expression here would be “slå två flugor i en smäll”.

The roadmap ahead

A holistic approach is ideal that enables the ERP system to integrate financial and operating systems, financial reporting, tax compliance and transfer pricing execution in an efficient way. The first step should be to establish a tax data hub within the organisations ERP environment and understanding the requirements for tax purposes. This will enable the tax function to collect all tax related data in one place and use Business Intelligence (BI) tools to map, analyse and report the information necessary for tax compliance and transfer pricing execution. If the tax function has limited tax technology, and/or IT support, to build a tax data hub internally, it can buy/license an off-the-shelf tax data hubs which thereafter can be adapted to suit the needs of the MNE. There are many benefits with this approach from saving time and resources on doing this manually to reliability, consistency and control over the information.

No one size fits all and our approach is similar. To have a more detailed conversation about how these issues and solutions can affect your business, please contact me or one of my colleagues.