Headline Verdana Bold Operationalizing Transfer Pricing ... · The way TP true-ups are implemented...

Headline Verdana BoldOperationalizing Transfer PricingFrom Theory to PracticeDeloitte Belgium, 16 May 2017

© 2017 Deloitte Belgium 2

Agenda

Operationalizing Transfer Pricing From Theory to Practice

Topic Content Presenters Timing

Introduction • Concepts & Framework Thierry Chaumantin 3:00 p.m. – 3:15 p.m.

Session 1: Implementing a TP Policy

• Manage E2E Cycle

• Structure operations

Jeroen Lemmens 3:15 p.m. – 4:00 p.m.

Session 2: Addressing Common Challenges

• Indirect Tax

• Management Reporting

• System Data Gaps

Liesbet Nevelsteen

Thierry Chaumantin

4:00 p.m. – 4:40 p.m.

Coffee Break (20 min)

Session 3: Case study: Applying Technology to manage E2E Process for Transfer Pricing on Goods

• Scenario

• Tool Demo

Thierry Chaumantin

Delphine Maeckelberghe

5:00 p.m. – 5:50 p.m.

Conclusion • Key Messages

• Next Steps

Jeroen Lemmens

Liesbet Nevelsteen

5:50 p.m. – 6.00 p.m.

Reception


Introduction


Transfer Pricing

Some Concepts often misunderstood by Business Finance Teams

Arm’s

Length

Mark-up

True-upVAT

Man


Operationalizing Transfer Pricing

The Building Blocks

2. Structure TP operations 3. Address common challenges

People & Organization

Policy & Process

Data & Technology

Indirect Tax

Management Reporting

System Data Gaps

Business model

Planning / Ex-ante documentation

TP procedures

Calculate

Process

Control

(Ex-post) Documentation

Defend

TP Life Cycle

Plan

Operate

Defend

1. Manage E2E TP life cycle


Traditional Transfer Pricing

Business model

Planning / Ex-ante

documentation

TP procedures

(Ex-post)

Documentation

Defend

TP Life Cycle

TP local file

TP master file

CbCR

Others

Plan

Black boxes

Defend

Documentation Focused

TP tax audit

TP policy

TP benchmarks

I/C agreement

I/C flow

Guidelines

Operating procedure


Operationalized Transfer Pricing

Business model

Planning / Ex-ante

documentation

TP procedures

Calculate

Process

Control

(Ex-post)

Documentation

Defend

TP Life Cycle

Manage the Numbers: Calculate, Process & Control

Plan

Operate

Defend

Specific

“know how”

required


Session 1

Implementing a TP Policy

Manage E2E TP Cycle & structure Operations



Manage the E2E TP Life Cycle



Policy & Process

Data & Technology

Indirect Tax


System Data Gaps


Business model


TP procedures

Calculate

Process

Control


Defend

TP Life Cycle

Plan

Operate

Defend


Manage the TP Life Cycle

Business model

Planning / Ex-ante

documentation

TP procedures

Calculate

Process

Control

(Ex-post)

Documentation

Defend

TP Life Cycle

“Plan” Phase – Check List TP

Manager

Plan

Operate

Defend

I/C flows classification

I/C agreements

Valid TP benchmarks

Actionable TP procedures

Procedure to identify change in business model


Manage the TP Life Cycle

Business model

Planning / Ex-ante

documentation

TP procedures

Calculate

Process

Control

(Ex-post)

Documentation

Defend

TP Life Cycle

“Defend” Phase – Check List TP

Manager

Ex-post documentation available

Alignment between ex-post and ex-ante documentation

Consistency between ex-post documentation of different countries

Plan

Operate

Defend


TP Life Cycle

Business model

Planning / Ex-ante

documentation

TP procedures

Calculate

Process

Control

(Ex-post)

Documentation

Defend

TP Life Cycle

“Operate” Phase – Check ListTP

Manager

Plan

Operate

Defend

Effective tools to calculate TP on goods

Effective tools to calculate TP on services

Adequate I/C invoice process

Approach to handle I/C price correction


Poll Survey

TP Life Cycle – Preliminary Assessment

1 I have a very accurate overview of all material intercompany flows in my supply chain.

2 There are effective internal procedures in place to rapidly detect any new intercompany flow that occurs during the fiscal year.

3 Each material intercompany flow can be easily referenced back to an up-to-date and valid TP Benchmark study (i.e. accepted during a tax audit).

4 Each material intercompany flow can be easily referenced back to an up-to-date and valid intercompany agreement (i.e. accepted during a tax audit).

5For each material intercompany flow, there is an effective internal procedure to check whether the activities performed by the related parties as described in the intercompany agreement match the ones used to perform the TP Benchmark study.

6 There is an annual review process to check whether existing intercompany agreements are still consistent with the way the supply chain operates.

7There is a TP policy that describes how the transfer prices need to be calculated for each intercompany transaction in order to meet arm’s length principles requirements.

8If it exists, the TP policy is rigorously followed in practice. More specifically, the setting of transfer prices is never the outcome of internal negotiations between the managers of the related parties.

9The way the transfer prices on tangible goods are set up do not have any impact on the performance bonuses of the local sales teams and/or manufacturing teams; more specifically, for the employees of a legal entity with a routine margin function (i.e. limited risk distributor, contract manufacturer).

10 There is an annual review process to check whether the TP policy is consistent with the way the supply chain operates.

11 The budget numbers are used to calculate transfer prices on tangible goods that need to be applied for the next fiscal year.

12There is a process to regularly calculate the correct transfer prices on tangible goods based on YTD actuals and the forecasts for the remainder of the year. These recalculated transfer prices are subsequently updated in the ERP.

13For legal entities with several functions (e.g. distribution and manufacturing), there is an easy mechanism to segment the entity EBIT by function so that the actual profit margin each function can be monitored separately.

14 Actual YTD EBIT segmented by function can easily be obtained on a quarterly basis both in management GAAP (IFRS) and in local GAAP.

15 Pro-active updates of transfer prices are regularly performed during the fiscal year to avoid large year-end TP true-up adjustments.

16 The allocation keys used for calculating intercompany recharge of services are well documented.

17The types of evidence needed to substantiate whether a given intercompany service has been actually performed, have been defined. The related supporting documentation is archived so that it can be easily retrieved during a tax audit.

18There is a well-defined procedure to identify which cost components are to be included or excluded (shareholder costs) from the cost base of intercompany service recharges.

19 The VAT treatment of all intercompany invoices (goods, services) has been reviewed and signed-off by the Indirect Tax team.

20The Indirect Tax impact (customs and VAT) of TP true-up invoices has been evaluated and potential negative consequences (e.g. custom fees & duties exposure, Intrastat reporting) are mitigated.

21The way TP true-ups are implemented (credit note/debit note vs marketing fees allocation) between related parties is consistent with the roles & responsibilities described in the related intercompany agreement.

22 The VAT treatment and VAT compliance of TP true-up invoices have been reviewed and signed off by the Indirect Tax team.

23 The way TP true-ups are booked, does not affect the business units’ Management Reporting (i.e. TP true-ups are always booked “below the line”).

24The financial reports required for local TP documentation (e.g. EBIT segmented by function, amount of intercompany sales & purchases by transaction type and counterpart) can be easily produced from my company’s ERP/financial systems.

25There is an annual review process to check whether the financial data included in the local TP documentation is consistent with the TP Benchmark studies and the TP policy.


Plan

TP Life Cycle – Preliminary Assessment result

78%

74%

61%

Percentage of those who think that it is not easy to reference back the material intercompany flow to an up-to-date and valid TP Benchmark study (i.e. accepted

during a tax audit).

Percentage of those who think that there are no effective internal procedures in place to rapidly detect any new intercompany flow that occurs during the fiscal year.

Percentage of those who think there is no proper annual review process to check whether the TP policy is consistent with the way the supply chain operates.

Business model

Ex-ante documentation

TPprocedures


Operate


50%

83%

61%

Percentage of those who think that the Indirect Tax impact of TP true-up invoices

has not been evaluated, nor that the potential negative consequences (e.g.

custom fees & duties exposure, Intrastat reporting) are being mitigated.

Percentage of those who are not sure whether that the transfer prices on tangible goods for the next fiscal year are based on the budget numbers.

Percentage of those who find it difficult to obtain the actual YTD EBIT segmented by function on a quarterly basis both in management GAAP (IFRS) and in local GAAP.

Calculate

Process

Control


Defend


56%

78%

Percentage of those who are not sure that there is an annual review process to check whether the financial data included in the local TP documentation is consistent with

the TP Benchmark studies and the TP policy.

Percentage of those who do not think that the financial reports required for local TP documentation can be easily produced.





Structure TP Operations



Policy & Process

Data & Technology

Indirect Tax


System Data Gaps


Business model


TP procedures

Calculate

Process

Control


Defend

TP Life Cycle

Plan

Operate

Defend


Identify Gaps in Roles & Responsibilities (Illustration)

TP Governance

TP Manager

FP&A Finance

IT

SSC

Indirect Tax


TPprocedures

Calculate Process ControlEx-post documentation


Policy & Process

Data & Technology


From generic TP Guidelines to Standard Operating Procedures (SOPs)

TP Procedures People & Organization

Policy & Process

Data & Technology

Statement of intent in terms of TP compliance

Key considerations in terms of I/C flows

PLI (Profit Level Indicator) to use for key flows

Who to contact for new I/C flows

Not an operational document for Finance/SSC

How is a TP procedure usually structured (if it exists)?

Goods – How To:

Use Budget & Forecast numbers

Segment P&L

Calculate TP

Update price in ERP

Generate & book TP true-up

Service – How To:

Determine cost base & cost components (shareholder, pass-through and conversion)

Collect and apply allocation Keys

Generate & book VAT invoice

How should the TP procedure be written to be operational: task

description & scheduling


TP Delivery

Aligning Data Flows with FP&A Cycle

Calculate

Control

Process

Transfer price to be applied to each

I/C flow

I/C invoice according to calculated

transfer price

Profit Level (PLI) of routine

functions: monitoring & adjusting

Budget

Actuals

Forecasts

FP&A

Finance Cycle

1

5

4

2

3


Policy & Process

Data & Technology


Maturity Level Assessment Score Card(Illustration)

Operationalizing Transfer Pricing


TPprocedures

Calculate Process ControlEx-post documentation


Policy & Process

Data & Technology

Strong

Weak


Session 2

Address Common Challenges

Indirect Tax, Management Reporting and System Data Gaps



Address Common Challenges



Policy & Process

Data & Technology

Indirect Tax


System Data Gaps


Business model


TP procedures

Calculate

Process

Control


Defend

TP Life Cycle

Plan

Operate

Defend


Two Different Worldviews

Transfer Pricing and Indirect Tax

• Profit allocation

• Routine margin

• Remuneration of intangibles

Transfer Pricing Impact on Indirect Tax

• Supply of goods & services

• Place of supply

• Supply value

Routine margin

Upward adjustment

Obtaining the ”right profit” based on functions, assets and risk

Applying the “right tax” based on transaction type

Indirect Tax

Mgt. Reporting

Data Gaps


TP True-Up Upward Adjustment and Credit Note

Typical Indirect Tax Challenge – Case 1

Import fees & duties leakage

Intrastat reporting

Reference to original invoices

CIT exposure for LRD

Entrepreneur Distributor (LRD)

I/C Goods supply

LRD remuneration is too LOW

Routine margin }

Upward adjustment

Transfer Pricing

Take no actionTake no action Issue credit note Issue credit note

Impact on Indirect Tax

Prices used for purchase of IC goods

are too HIGH

Decrease inventory valuation & COGS


TP True-Up Downward Adjustment and Debit Note

Typical Indirect Tax Challenge – Case 2

Import fees & duties exposure

Intrastat reporting

Reference to original invoices

CIT exposure for

Entrepreneur


I/C Goods supply

LRD remuneration is too HIGH

Routine margin

}Downward adjustment

Transfer Pricing

(Except in some countries

where downward

adjustments are not CIT

deductible leading to

double taxation)

Take no actionTake no action Issue debit note Issue debit note

Impact on Indirect Tax

Prices used for purchase of I/C goods

are too LOW

Increase inventory valuation & COGS


TP True-Ups as Marketing/Sales Support Service Allocation

Typical Indirect Tax Challenge -3

Case 1LRD remuneration is too LOW

Case 2LRD remuneration is too HIGH

LRD needs to be remunerated for its local marketing support

Entrepreneur needs to be remunerated for its sales support

Main Supply

Routine margin

}Upward adjustment

Routine margin

}Downward adjustment

Correction


I/C Goods


I/C Services

Buyer Seller

Local marketing support

Seller Buyer

Sales support


Difference in Transfer Pricing & Indirect Tax Reasoning

TP True-Ups as Marketing/Sales Support Service Allocation

Transfer Pricing

Reasoning• LRD guaranteed routine margin is

based on mutual services performed

by both the LRD and Entrepreneur

• Distribution agreement describes

services performed by LRD &

Entrepreneur and mutual obligations

• Distribution agreement is aligned

with facts (i.e. headcounts in LRD

and Entrepreneur performing

services mentioned)

Transfer Pricing

Reasoning

Indirect Tax

Reasoning

• Qualification of supply: Supply

provider (Entrepreneur vs. LRD) can

alternate from one period to the

other

• Supply value: Supply value can

vary based on LRD profit margin

• Place of supply: Local marketing

service from LRD can trigger non-

recoverable foreign VAT for the

Entrepreneur in some countries

Indirect Tax Exposure


TP True-Ups – Pro Active Price Adjustments (1)

Resolving Transfer Price and Indirect Tax Requirements Conflicts

Q1 Q2 Q3 Q4

}

TP1 1

2

3

1

2

Set up transfer price

Calculate Actuals YTD margin

3 Extrapolate year-end margin

Main Supply


I/C Goods

Routine margin }

Routine margin




Q1 Q2 Q3 Q4

}

TP1

5

4

5

Calculate upward/downward adjustment on extrapolated year-end margins

Calculate new transfer price for upcoming quarters

}TP2

6TP2

6 Set up new transfer prices

4

Routine margin

}

Main Supply


I/C Goods




Key benefits

• Steer Year-End YTD margins with transfer prices updated on a periodical basis

• Aligned with TP requirements(reach routine margin)

• Aligned with Indirect Tax (VAT, Customs requirements): consistent supply of goods

Points of attention

• Transfer Price calculationIncrease frequency to avoid big swing from one period to another

• Simulation tool to manage:

− Volume, product mix, overhead cost allocation

− Constraints (e.g. Transfer Pricing above product cost, regulatory price,...)

− As If scenarios (e.g. stock increase, stock duration,…)

• Automated interface to ERP to manage regular price updates


Two Different Worldviews

Transfer Pricing and Management Reporting

• Legal entity

• Routine vs. entrepreneur

• Controlling transfer price

Transfer Pricing Management Reporting

• Product line / Business unit

• End to End margin

• Eliminating transfer price

“Profit allocation based on value drivers”

”Optimizing E2E margin”

Manufacturer Distributor

Transfer price


Supply chain

Costs Revenues

E2E marginRoutine margin

Residual profit

Indirect Tax

Mgt. Reporting

Data Gaps


Inventory Valuation/COGS Accounting – Challenge Example

When Transfer Prices & Management Reporting Conflict


Transfer price

Costs (*) Revenues

• Material

• Labor

• Machine

Standard (actual)

cost{

• Standard (actual) cost

• TP margin

(*) simplified: real case also contains

packaging and transportation costs &

overhead

• E2E margin

• Standard (actual) cost


Distributor COGS

Standard (actual)

cost

Distributor COGS

Transfer price


Inventory Valuation/COGS Accounting – Solution Example

When Transfer Prices & Management Reporting Conflicts

1 Booking inventory at standard cost, expensing TP margin

2 Manage COGS account roll-up: Transfer Pricing vs. Management Reporting

COGS booked at standard cost2

3 Re-Classify PPV to inventory for unsold stock at year-end for statutory reporting

Inventory (B/S)

Standard cost

100 €

IC AR/AP (B/S)

Transfer Price

110 €

PPV (*) (P&L)

TP margin

10 €

(*) PPV = Purchase Price Variance

Inventory (B/S)

Standard cost

100 €

COGS

Standard cost

100 €


COGS (*)

(*) PPV is left “Below the Line” in the Management Roll-Up

Standard cost

100 €

COGS & PPV

Standard cost

100 €

TP margin

10 €


Key Principles – TP Components should be booked Below The Line

Transfer Pricing and Management Reporting

Ensure that all TP components are

“Below the line”


Focuses on “Above the line”, i.e.

what can be managed by the

Business Finance managers

• Dedicated TP GL account or sub-account in management GAAP

• Set up management vs. statutory accounting roll-up

• Configuration of BI management and statutory report – dual GAAP

Sales

(COGS)

(Overhead)

Management OP

Above the line: should not contain any TP component

(I/C services)

(I/C TP components)

(I/C TP true-ups)

Below the Line: will be eliminated during I/C elimination

Statutory OP


Common Issues – Data

Transfer Pricing & System Data Gaps

Budgets are prepared using Management Reporting dimensions but not legal entity dimensions: • Business Units • Product Group• Market /Customer Group

02

01If EBIT Budget & Forecast can be linked to a legal entity, there is no automatic segmentation by function 04

03

05Forecasts do not usually contain volume information (only monetary equivalent)

Budget, Forecast and Quarterly Actuals are usually in management GAAP (IFRS, US GAAP) vs. local GAAP

Budget & Forecast are externally focused and do usually not contain• I/C margin on tangible

goods • I/C recharge of services

Indirect Tax

Mgt. Reporting

Data Gaps


Common Issues – Technology


Challenges in getting adequate reports for calculation purposes• BI reports: gross margin by

product and EBIT reports • GL account analysis: manual

GL journals/postings – PPV, inventory valuation

02

01Challenges in updating ERP back• Pricing procedures/tables

update • I/C invoice processing (TP

true-up)03

Complex calculations in Excel spreadsheets to manage• Mapping • Reconciliation• Segmentation • Simulation • Output reports


Pricing & modelling tool

• Benefit of Excel in terms of flexibility and user-friendliness

• Additional functionality

− Audit trail - update

− Server storage

− Workflow

Common Solutions


TechnologyData

Data

Rules & formulas

• Extrapolation IFRS to Stat adj.

• Extrapolating volume forecast

• EBIT segmentation by product SKU

Part of ERP/EPM upgrade (S/4 HANA)

• Entity dimension

• I/C service recharge

• Fully loaded entity P&L

Short & Medium Term

Long Term


Session 3

Case Study

Applying Technology to manage E2E Process for Transfer Pricing on Goods


Luminova: Manufacturer of Lighting Systems

Demo Case

BE10

FR10

NL10

CZ30

• HQ based in Geneva, Switzerland

• 3 sales organizations in Belgium, the Netherlands and France

• 2 production plants: Belgium and France

• 1 Shared Service Center in Czech Republic

• Luminova has a Swiss principal company

• Headcount: 320 employees

Sales Organization

Sales Organization & Plant

Shared Service Center (SSC)

Principal

CH10


Luminova – Organizational Structure

Demo Case

Group

Functions

Legal entities Luminova

BE10 FR10 NL10 CZ30 CH10

Manuf. Distr. Manuf. Distr. Manuf. SSC Principal


Luminova – TP Pricing Model Structure

Demo Case

Manufacturing Company

Principal (HQ) Distributing company

Budget Standard

cost

Budget Standard

cost

Budget Standard

cost

Manuf. margin

Manuf. margin

Manuf. margin

Principal margin

Principal Margin

Sales margin

A

B

C

Clients

Goods flow

Invoice flow

Sale Price composition

Goods flow

Invoice flow Invoice flow

Sells at A Sells at B

Sells at C

NCP%

OM%


Luminova – TP Pricing Model Assumptions

Demo Case

Production costs & inventory

For demo purposes, we have assumed that• the labor costs & the cost of raw

materials are consistent between countries

• the sales volume will be equal to the production volume.

TP benchmarking methods

TNMM method is used with the following PLIs: NCP for manufacturers and OM for distributors.

ERP TP setup

Manufacturer is a cost plus on standard cost and distributor resale minus on list price.


Luminova – Data Flow

Demo Script

User legend

Sales Manager

Finance controller

Supply Chain Manager

Tax Manager

* Idem as Q1 Forecast steps

Perform

top-down Sales

budgeting

Step 1

Review

top-down budget and

perform bottom-up

Sales budgeting

Step 2

Budget production costs

and calculate COGS

Step 3

Actuals FY16 load

Step 0

Budget

OPEX, IC service

recharge & Allocation of

OPEX

Step 4

Transfer price

calculation for budget &

review of financial

statements

Step 5

Bottom-up Sales

forecast

Step 7

ACTUALS BUDGET Q1 FORECAST

Actuals load first three

months FY17

Step 6

Transfer price

calculation for budget &

review of financial

statements

Step 9

Copy OPEX and COGS

budget to forecast

Step 8

Maintenance

of user roles, access

rights and master data

changes


Solution built in Anaplan

Operational TP Tool Demo


Key Benefits

Transfer Pricing Modelling in Anaplan


Conclusion


Key Messages

Conclusion

Write a detailed transfer pricing policyA standard operating procedure for Finance, SSC and the IT team, including Indirect Tax aspect

Apply technology Use tools to integrate transfer pricing with the FP&A finance cycle. Tailored tools can be easily built (e.g. Anaplan)

Manage the full E2E TP CycleNot only your transfer pricing documentation


Next Steps

Conclusion

Complete a detailed “Maturity Level Assessment”Where are the gaps?

2Make a business case for an operational transfer pricing toolE2E TP process cannot be effectively managed without technology

1


Deloitte’s Quick Start Operational TP Lab

How To Get Started

Business model


TP procedures

Calculate

Process

Control


Defend

TP Life Cycle

Plan

Operate

Defend

One day workshop

All key operational TP stakeholders

Maturity assessment (Risks & Opportunities)

Defining the end state

Drafting an action plan


Contacts


Jeroen LemmensPartner

Liesbet NevelsteenPartner

Contacts

Thierry ChaumantinSenior Manager

Jérôme LibioulManager

Company: DeloitteOffice: ZaventemTelephone: +32 2 600 69 82

E-mail: [email protected]

Company: DeloitteOffice: Zaventem

Telephone: +32 2 600 66 53E-mail: [email protected]





mailto:[email protected]


http://intranet/sites/TAL/Tax Personel Pictures/Photoshoot 2016/Partners/Nevelsteen Liesbet 1.jpg

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http://intranet/sites/TAL/Tax Personel Pictures/Photoshoot 2016/Directors and Managers/Chaumantin Thierry 1.jpg

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Appendix


Company and product key facts

Introduction to Anaplan

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, tax and legal, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 225,000 professionals, all committed to becoming the standard of excellence.

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

© 2017 Deloitte Belgium

Headline Verdana Bold Operationalizing Transfer Pricing ... · The way TP true-ups are implemented...

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