Jonne Kregting, OECD/International * ** and Carl ...

Tax Technology Applied to Supply Chain The complexity of the external tax/transfer pricing environment is only increasing, as are tax authority demands for increased data transparency – a lot to balance for multinationals managing diverse supply chains. This article explores the risks and opportunities, namely how operational transfer pricing (OTP) technology could increase transparency, compliance and efficiency.

1. Introduction

These days, companies often have complex and diverse supply chains in their operations, across multiple jurisdic-tions. This makes it difficult to manage all the associated tax implications, even beyond tax compliance. Manag-ing supply chains from a tax perspective requires a holis-tic view that encompasses all tax areas, as there are many interdependencies. This holistic view requires insights into large volumes of transactional supply chain data. The question is: What role does the use of technology play in all this? Do your tax and finance teams have ready access to the data they need to ensure compliance with US tax reform, base erosion and profit shifting (BEPS) and other government reporting requirements?

In this article, we address the internal and external drivers for the use of technology in the tax function. Section 2. dis-cusses drivers for the use of technology in the tax function. Section 3. focuses on operational transfer pricing (OTP) and the importance of a connected transfer pricing (TP) function. Section 4. answers the question of how technol-ogy can enable the TP lifecycle. Section 5. zooms in on OTP through a business case and reviews various consid-erations for the implementation of advanced technology in the OTP function. Section 6. provides the conclusion.

2. Drivers for the Use of Technology in the Tax Function

There are many drivers for the use of technology in the tax function of corporations, both internal and exter-nal. The external ones are the following. First, the reg-ulatory framework for international tax has evolved sig-nificantly in recent years, through calls for transparency both by individual countries, including China and the United States, and within the undertakings of interna-tional organizations such as the OECD and the Euro-pean Union. This evolution has been driven by increased scrutiny of and media attention on large corporations, which have allegedly paid insufficient tax in jurisdictions where they operate.1 With regard to TP disclosure require-ments, most notably the development of TP documenta-tion rules under the OECD BEPS Project, which include country-by-country reporting (CbCR) as well as local file and master file requirements. The United States has also domestically introduced disclosure requirements for public companies.2 Moreover, financial institutions have been separately targeted by disclosure rules through the introduction of the OECD’s Common Reporting Stan-dard (CRS),3 the EU Capital Requirements Directive (2013/36)4 and the US Foreign Account Tax Compliance Act (2010).5 Furthermore, the Global Reporting Initia-tive (GRI) has released its new standard, GRI 207: Tax 2019, which will be effective for reports or other materi-als published on or after 1 January 2021. It has a particular focus on disclosure of tax and payments to government.6 Second, tax administrations have been focusing on digita-

1. For an in-depth discussion of public pressure in favour of transparency, see e.g. T. van den Berg & A. Spitzmueller, Chapter 1: Introduction to Tax Accounting, in Tax Accounting: Unravelling the Mystery of Income Taxes sec. 1.5, Global Topics IBFD (accessed 17 June 2020).

2. See US Securities and Exchange Commission, Spotlight on Disclosure Effectiveness (last updated 13 Dec. 2016), available at https://www.sec.gov/spotlight/disclosure-effectiveness.shtml (accessed 17 June 2020).

3. The Common Reporting Standard calls upon jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the finan-cial institutions required to report, the different types of accounts and taxpayers covered and the common due diligence procedures to be fol-lowed by financial institutions.

4. Directive 2013/36/EU of the European Parliament and the Commis-sion of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD IV), OJ L176 (2013).

5. US: Foreign Account Tax Compliance Act of 2010, Pub. L. no. 111-147, Stat. 124 (201) 97.

6. See GRI, Development of GRI 207: Tax 2019, available at https://www.globalreporting.org/standards/work-program-and-standards-review/development-of-gri-207-tax-2019/ (accessed 28 June 2020). The stan-dard contains three management approach disclosures and one top-ic-specific disclosure on country-by-country reporting. The man-agement approach disclosures require a narrative explanation of how organizations manage tax.

OECD/InternationalEmanuel Baptista,* Jonne Kregting,**

Anuschka Bakker,*** Marcel van den Brink**** and Carl Fredrik Henriksen*****

* EY; the author can be contacted at [email protected]. The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.

** Senior Manager TP Processes & Technology, Teva, the Netherlands. The author can be contacted at [email protected].

*** Manager VAT, Transfer Pricing and Specialist Knowledge Group, IBFD. The author can be contacted at [email protected].

**** EY; the author can be contacted at [email protected]. The views ref lected in this article are the views of the authors and do not necessarily ref lect the views of the global EY organization or its member firms.

***** EY; the author can be contacted at [email protected]. The views ref lected in this article are the views of the authors and do not necessarily ref lect the views of the global EY organiza-tion or its member firms.

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Exported / Printed on 4 Mar. 2021 by [email protected].

lization. Various countries have implemented additional disclosure requirements related to tax audits or routine compliance processes with which taxpayers must comply from time to time or regularly. For example, the OECD’s SAF-T model may be needed for VAT reporting require-ments as well as various customs declarations for impor-tation and exportation. The requirements may differ from country to country. A coherent approach to managing such routine compliance may significantly simplify the processes.7 Compliance with these disclosure require-ments is time-consuming and may be costly for multi-national enterprises (MNEs), hence the need to improve efficiency as well as implement a coherent, standardized and proactive approach provided by utilizing tax tech-nology. Third, another external driver is disclosure upon request in the event of audit. In a TP audit, a corporation may face a situation in which a large amount of informa-tion needs to be provided in a certain timeframe. From a risk management perspective, it is essential to have a con-sistent and aligned set of facts towards the tax authorities, supported by the correct figures.

The following are the internal drivers for using technol-ogy in corporations’ finance and tax function. First of all, due to the increased disclosure requirements, includ-ing those not necessarily related to accounting and tax, more work needs to be done by the same number of tax and compliance employees, unless the company accepts the additional costs of hiring new staff to deal with the disclosure requirements. Second, MNEs are increasingly using finance shared service centres to centralize related functions and benefit from group synergies. By utilizing tax technology to increase efficiency, corporations could possibly do this additional work with fewer employees, leading to cost savings. Third, through using technology, tax departments within MNEs can move from a reac-tive to a proactive mode. A tax department in a reactive mode is simply keeping pace with and meeting its com-pliance requirements, similar to firefighters responding to incidents when they occur. Switching to a proactive mode means that all compliance, reporting and disclo-sure activities are coordinated and form a first line of defence upon audit or enquiries from the tax authorities. This will further increase efficiency in swiftly responding to the developments described as external drivers above, including more complex or sophisticated disclosure, audit and routine compliance processes. As such, a proactive tax department is one that uses tax data analytics to assist in the decision-making process in areas such as detection of risk, opportunity identification, projections and scenario planning and overall business support. Fourth, technol-ogy is becoming increasingly important to the tax func-tion as tax departments need, for example, to provide more insights for the benefit of other departments regard-

7. See the following articles in this special issue: D. Jegorov, Technologi-cal Advances in Administering Taxes: Will There Be a Tax Office in the Future?, 74 Bull. Intl. Taxn 10 (2020), Journal Articles & Papers IBFD; R. Zambrano & I.G. Arias E., Technology and Tax Administration Control in Latin America, 74 Bull. Intl. Taxn 10 (2020), Journal Articles & Papers IBFD; and M. Zackrisson, A. Bakker & J. Hagelin, AI and Tax Admin-istrations: A Good Match, 74 Bull. Intl. Taxn 10 (2020), Journal Articles & Papers IBFD.

ing monitoring of costs, profitability, effective tax rate and the value of people and assets, as well as providing input on potential changes to structures or business units for the benefit of the group as a whole.

3. Operational Transfer Pricing

3.1. Introductory remarks

The increase of the disclosure requirements mentioned in section 2. intensifies the need for a structured TP process and the importance of a connected TP function.

Historically, the TP function was focused on the formal compliance requirements, i.e. on TP documentation requirements and on controversy and litigation. However, currently, in order to ensure that the company adheres to the TP policy as documented in the TP documentation, the operational processes of the TP function have to be effectively managed (material compliance).

The end-to-end process that focuses on both formal and material compliance is referred to as the TP lifecycle. This is a sequential and recurring process and is depicted in Figure 1.8

3.2. TP lifecycle

The TP lifecycle includes the end-to-end TP processes (i) planning and policies; (ii) price setting and contracts; (iii) transactions and journal entries; (iv) monitoring and adjusting; (v) testing and compliance; and (vi) controversy and litigation. The processes from price setting and con-tracts to testing and compliance (ii-v) are referred to as the OTP processes mentioned earlier.

If a company does not properly manage these four OTP processes, it might be formally compliant by having TP documentation in place, but there is a high likelihood that it will be not be materially compliant. This means that the pricing of actual intercompany (IC) transactions and the defined TP policy will not be in sync.

The OTP processes in the TP lifecycle begin with setting the transfer prices for goods and services for the financial year. These transfer prices will have to be covered by IC contracts and must ref lect the TP policy, including the benchmark studies results, as defined in the TP docu-mentation.

After generating the calculated transfer prices, they must be uploaded in the transactional systems. The IC transac-tions that will occur in subsequent periods will be based on the applicable transfer prices from that point onwards. The IC transactions will generate financial results and these financial results will have to be monitored during the year in order to validate whether the IC prices result in a profitability that is in accordance with the TP policy. This monitoring requires a so-called segmented profit and loss statement (P&L). A segmented P&L is the P&L of a legal entity that is segmented by TP function and TP method, and typically goes down to operating profit.

8. Illustration provided by EY.

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tax technology Applied to Supply chain


If, during the monitoring process, deviations from the benchmarked profitability levels are identified, the pre-ferred correction mechanism is to use prospective in-year adjustments to the transfer prices, i.e. the transfer prices of goods and services will be adjusted during the year to arrive at the benchmarked profitability margin by year-end. This is a recurring process that can occur multi-ple times per year, ranging from monthly to quarterly or semi-annually. The process aims to prevent or limit the year-end adjustments. The dynamics of adjusting IC prices is heavily dependent on the type of company, the industry, the countries involved and the local tax and non-tax rules impacting transfer prices.

At year-end, the company runs a final test of the trans-fer prices. If the actual profitability margin is outside the interquartile range of the benchmark study, the company can decide to post a year-end adjustment (a credit/debit note). After year-end, the final segmented P&L is gener-ated and included in the TP documentation, for example, the local TP documentation files and other mandatory disclosures, such as the reportable transactions in sched-ule M for form 5471 in the United States.

3.3. Collaboration and alignment with other business functions

Typically, the responsibility of the planning and policies and controversy and litigation processes are the responsi-bility of the tax or TP department. However, the respon-sibility for the OTP processes, from price setting and contracts to testing and compliance, often sits across multiple business functions such as controlling, finance and accounting and actors such as shared service centres. Hence, the execution of the OTP processes requires close collaboration and alignment.

The multitude of business functions and actors involved, often with shared responsibilities among them, creates additional complexities. A few examples of these com-plexities are: – to set the IC prices and contracts for the new financial

year, the TP team will need to have access to budget

data. The preparation of the budget data is normally performed by the business unit controllers and the financial planning and analysis teams;

– for the allocation of indirect costs, required for the segmented P&Ls and for the calculation of the trans-fer prices, the cost driver data is often not available in the financial systems. To collect this information, the TP team and the business unit controllers must interact with other departments such as IT or HR; and

– if, during the monitoring and adjusting process, the TP team identifies the need to perform a retro-spective adjustment, the order to cash team (to issue credit/debit notes), treasury and business unit man-agers will need to intervene.

These examples show that there are several functions and factors involved with separate responsibilities. That is why it is crucial to have an integrated TP function that acts as a business partner and is connected with all the differ-ent stakeholders involved in the end-to-end TP lifecycle, particularly with enterprise systems and IT, with finance, accounting and controlling, and with global, regional and local business services.

3.4. Impact of TP on other tax, finance and business functions

In order to assess the optimal transfer price mentioned in the price setting and contracts and monitoring and adjust-ing processes, the TP function must include the impact on other taxes, such as indirect taxes, withholding tax and customs duties. However, (changes in) transfer prices also have an impact on finance, accounting, controlling and treasury processes. For example, transfer prices impact IC profit elimination in the consolidation process, and inventory revaluation is affected by changes in transfer prices and the cash position in the countries. In addition, specific industry price regulations that limit changes in transfer prices, which are common in the pharmaceuti-cal industry for example, must be considered. The spe-

Figure 1 – TP lifecycle


emanuel baptista, Jonne Kregting, Anuschka bakker, Marcel van den brink and carl Fredrik Henriksen


cific example of the pharmaceutical industry regulations is further detailed in section 5.2.

It is also important for MNEs to align their policies with respect to TP and customs duties.9 TP adjustments may trigger some practical issues and may require that a pro-visional (value) declaration is filed. It could result in addi-tional duty owed and may require disclosure. Further, a penalty with interest could be due. If companies make a downward TP adjustment, there should, in theory, be a request for refund and overpaid customs duties should be repaid.10 In this respect, we note that many MNEs are still managing their TP adjustments (TPA) retrospectively through credit/debit notes, and often still perform them at aggregated levels, for example, at the legal entity and TP function level. Section 5. considers specific factors driving transactional TPAs from a corporate perspective.

The issuing of these credit/debit notes inhibits alignment between the transfer price and customs valuation as it is not possible to tie them to the original invoices, leading to either overpayment in customs duties or inability to comply with customs duty rules.

In summary, insufficient focus on OTP drives significant compliance challenges, inefficiencies as teams run after the data instead of interpreting it, and cash leakage from inability to align TP with customs valuations and mate-rialized FX exposure.

4. OTP enabled by Technology

4.1. How can technology enable the TP lifecycle?

As with the finance function, TP teams used to execute the OTP process using spreadsheets. This approach is prone to issues such as human error, lack of data trace-ability, performance issues and hero dependency. Consid-

9. In addition to administrative procedures related to customs, countries may also have separate VAT reporting requirements. These would gen-erally be on a transactional level, either based directly on the OECD’s SAF-T model (e.g. in Lithuania and Poland) or on their own concepts (e.g. in Czech Republic and Romania) and with (near) real-time report-ing such as in Spain.

10. In addition, cooperation between tax authorities and customs authori-ties increases the likelihood of audits and adjustments. The tax authori-ties dealing with TP are becoming more informed about changes related to customs. Hence, MNEs should make sure that their policies related to customs and TP are aligned. Furthermore, year-end adjustments may prompt tax authorities to initiate audits. Local tax authorities can be very critical towards year-end adjustments.

ering the trend towards transparency in IC transactions and the increase in the level of granularity of information that companies will have to disclose on their IC transac-tions, the challenges become uncontrollable and drive the need to start using technology.

4.2. OTP data challenges

The data required for the operational steps of the TP life-cycle mean that the TP team faces a dilemma of sourcing either financial reporting data or managerial reporting data (see Figure 2).

For TP, the data dimensionalities of both the financial reporting and management reporting are required. So, the data dilemma is not so much making a choice between either financial reporting or management reporting data, but how to blend them together.

There are various steps to overcoming the data challenge. Much depends on the structure of data available. For TP, it is necessary to segment data based on product details and supply chain information (customer and supplier), together with an allocation of the indirect expenses (i.e. data without product and supply chain details), in order to monitor the profitability down to operating profit.

This process seldom needs to be completed with the input (either automated or manual) of adjustments such as local GAAP adjustments or any other required reclassification. When the input does need to be aligned with local con-trollers, with data that is not easily recognizable for them, misalignments frequently occur. Additionally, the efforts in bundling data from different sources and with different granularity also result in difficulties in reconciling them with the source systems.

Combining financial reporting data with managerial reporting data, materialized into spreadsheets, resulted in complex formulas that were extremely prone to errors, typos and misalignments; only very few people in the organizations were able to work with them. This leads to an extreme hero dependency within the tax function, which entails an underlying compliance risk.

The chaotic process and governance of these spread-sheets is likely to become worse year after year, due to the aforementioned increase in disclosure requirements, the growth in products and business models and, often, mergers with and acquisitions of other companies.

It is not a surprise that the TP function has gradually started pursuing the ambition to automate parts of the TP lifecycle through technology-enabled solutions. This

Case Study

A multinational chemical company has its manufacturing operations in europe and its distribution entities in Asia. the Asian distribution entities were not making their target profit in accordance with the benchmark studies, and so the company had to issue credit notes to the Asian distribution entities that could not be tied back to the original invoices. the credit notes issued resulted in an overpayment of custom duties amounting to eUr 6 million on an annual basis.In addition to the customs duty impact, a significant FX exposure on the credit note arises, amounting to eUr 3 million.

Outcomes from the TP maturity model

“Large tP adjustments are more often the case than the contrary”“reports from the erP system are not sufficient for monitoring purposes”“there are limited content management or workflow solutions”“Difficulties related to segmentation of data are a significant issue when setting transfer prices”




ambition is clearly ref lected in the results of a TP matu-rity model survey,11 presented in Figure 3.12

The TP maturity model survey collects and analyses information on the current and desired state of the tax/TP functions, in a series of IC dimensions, of MNEs in different areas across the globe. When combining the results from all these MNEs, the biggest gap between their current state, the leading practices and the desired state is found in the technology and data dimension.

Having identified that the main hurdle is related to the use of technology and data, it is time to address how MNEs have evolved from the use of spreadsheets to integrated technological platforms to support their TP function. The initial focus was on replacing the pain points that derived from using spreadsheets, or to include the features that the spreadsheets could simply not deliver in a satisfactory way. The first implementation steps were around moni-toring capabilities, which gradually started including cal-culations and the resetting of transfer prices to reach the targets and reduce the year-end adjustments. These MNEs preferred to deploy the solutions in their existing plat-forms, common with other tax and financial applications, aiming to leverage existing data and internal knowledge and guaranteeing future scalability of the solutions.

11. EY teams conduct a maturity model survey in which they collect and analyse information on the current and desired state of the tax/TP functions in a series of intercompany dimensions, such as transactions; operational strategy and performance management; policies and guide-lines; process and controls; technology and data; people and organi-zation; legal structure and framework; pricing and financial and tax reporting; and compliance. The survey is filled in by CFOs, heads of tax, TP directors, treasurers and others responsible for TP in hundreds of MNEs in different industries all over the world. The results allow com-parison of companies with their peers and with leading practices in the tax and finance function.

12. Illustration provided by EY.

4.3. End-to-end OTP solution

But how does an end-to-end OTP solution work? A tech-nology-based OTP solution can support the four interme-diate mega-processes of the TP lifecycle.

The benefits can be achieved from the data sourcing and configuration (input), the automation of the calculations and data processes (calculations) and the delivery of intel-ligent data analytics and reporting capabilities (output), as shown in Figure 4.13

OTP solutions are based on five main functional layers (see Figure 5).14

The first layer is the establishment of a TP database or data warehouse where data and master data are automatically uploaded, sharing a common platform with other busi-ness functions and jurisdictions. The data and master data need to be harmonized and structured for the specific TP purposes. It should combine data from different scenar-ios and granularity levels such as actual and forecast data.

The second layer is the configuration of a f lexible TP data model in order to accommodate changes in TP policies and business models: (i) enrichment of the data with addi-tional information that is not available in the underlying systems (i.e. segmentation drivers); and (ii) configuration of the rules that will be used in the process (i.e. identifica-tion of TP method or definition of allocation keys).

The third layer is the calculation engine that automates the calculations and rules that need to be applied during the process: the segmentation of the P&L of legal entities with multiple TP functions (e.g. distribution and manufactur-

13. Illustration provided by EY.14. Illustration provided by EY.

Figure 2 – Transfer pricing reporting dimensions




ing) and the allocation of overhead expenses. The solution should calculate “intelligent” TP adjustments, consider-ing the impact of indirect taxes, custom duties, inventory valuation and FX exposure, and deliver price updates and credit/debit notes.

The fourth layer is data analysis and reporting. This layer will include segmented TP reports and dashboards, with modern analytical capabilities such as red f lags, KPIs and management by exception functionalities to facilitate the monitoring of the process. It also generates output tailored

reports for tax compliance, e.g. supporting TP documen-tation and CbCR.

The fifth layer is the data “write back” capability. The tax function requires the capability of performing manual adjustments (e.g. conversion to local generally accepted account principles, IC services, adjusting of transfer prices, issuing of credit/debit notes) and is not limited to a mere reporting exercise. In that way, it is crucial that an OTP solution facilitates writing of data into the under-lying systems and does not only provide analytical capa-bilities.

Figure 3 – TP maturity model survey results

Figure 4 – End-to-end OTP solution




Alongside these five layers, an OTP solution must also provide a backbone structure for the TP lifecycle with a system-enabled workf low and content management.

4.4. Why do MNEs invest in OTP solutions?

Normally, the external drivers as defined in section 2. are the leading factors in driving the need. However, based on the business cases conducted, the benefits of an OTP solution can be understood from a triple perspective: (i) compliance and risk; (ii) efficiency; and (iii) business value and cash leakage.

From the compliance and risk perspective, an OTP solu-tion reduces the time spent managing audits and the like-lihood of losses from audit settlements. It also reduces rep-utational risk and builds a solid archive of data to enable audit defence.

From the efficiency perspective, there is an effective reduction of the time spent performing TP calculations, and it enables companies to use bigger data sets, run larger operational processes and unify both to provide increased analytic capabilities. It also allows for better support in controversy cases (archiving of data).

Lastly, from the business value and cash leakage perspec-tive, there is a reduction impact associated with TP adjust-ments and uncertain tax positions, and reduction of the cash leakage associated with inaccurate transfer prices (custom valuations, FX exchange, etc.).

5. Operational Transfer Pricing from a Company’s Perspective

5.1. Introductory remarks

From sections 2. through 4., it has become clear that there are strong internal and external drivers for the increased use of technology in the tax function. It is apparent that, especially in tax functions that work on a transactional level, such as TP, customs and VAT, the smart implemen-tation and use of technology and data can make a big dif-ference.

However, no IT project is without its difficulties. It can be expensive, is often delayed and can put additional pres-sure on an organization. Therefore, it is important to set the right conditions and requirements and to build a solid business case with an accompanying project plan. In determining a company’s technology needs and require-ments, context can be everything, and project execu-tion, organizational adoption and design should also not be underestimated. It should be considered whether the resulting wish list fits the organization and its capabili-ties. In order to demonstrate this, the following sections explore the experiences of Teva Pharmaceuticals (“Teva”) in upgrading its OTP capabilities using technology.

5.2. Context

Teva is a large MNE, one of the market leaders in generic pharmaceuticals, and started innovating its OTP function about three years ago. This strategy was not driven only by greater external compliance standards or by an inter-nal strive for increased efficiency. Some context-specific factors apply as well:

Figure 5 – OTP technology landscape




– Industry. The healthcare industry is heavily regu-lated and there are many central and local health codes to consider. This presents a range of challenges; products need to be highly localized, distribution channels are highly diverse, etc. For TP and VAT, this means that different operational models apply across, and even within, jurisdictions.15 Therefore, when calculating transfer prices or adjusting them retroactively, one must consider local conditions. At the same time, these rules and regulations provide an opportunity for OTP: they stipulate that the origin of a specific medicine and its active ingredients should be transparent and traceable. The systems that track and trace the movement of materials and products through the supply chain are already in place.16 The data is there! The consideration from the technologi-cal perspective would be how to leverage the available information into an OTP system that can identify all cross-border transactions on a very detailed level.

– Business model. Teva is a largely vertically inte-grated company. In addition to finished products, it is involved in the production of active pharmaceu-tical ingredients (API). The company has acquired various successful businesses over the years in order to provide its distribution channels with a wide port-folio of products. At the same time, industrial oper-ations and related intellectual property (IP) remain (partly) within the management of the acquired busi-nesses.17 This business model design creates many different cross-border f lows; any given distribution company (limited risk distributor, LRD) sources its products from at least ten different intercompany partners (ICPs).18 In addition to the distribution function, marketing, payrolling and R&D services are common IC transactions present in the LRDs. This complexity results in more than 50 different applicable TP calculations for each separate legal entity.19 Each and every one of these rules needs to be considered in calculating or adjusting transfer prices. An OTP technology solution hence provides a huge opportunity to align these calculations to common standards.20

– Operations. In terms of volume, Teva is one of the largest pharmaceutical companies in the world: more than 200 million people use its products every day and the company has tens of thousands of

15. That is, depending on the to-market distribution channel (over the counter, through a pharmacy or through healthcare institutions).

16. This specific characteristic of the healthcare industry facilitates the automated identification of the TP functions and TP methods used in the data segmentation described in section 4.2., unlike in other indus-tries such as the chemical industry.

17. Careful management of this is another challenge for the legal, tax and TP departments.

18. ICPs can be fully-f ledged manufacturers, hub companies or contract or even toll manufacturers.

19. More than 70 LRD entities regularly calculate transfer prices and TP adjustments.

20. Another option, in lieu of adopting a technological solution, could be to move the business model to e.g. a private trust company structure and reduce or simplify the number of ICPs, thus simplifying TP calcu-lations.

stock-keeping units (SKUs). In combination with the business model, this creates a complex legal corpo-rate structure and poses a significant challenges for transactional functions such as TP and VAT. Supply chains continue to switch as production volume and product portfolios are shared across production sites.21 Another opportunity for technology would be to develop a system that could quickly respond to such changes.22

Considering the foregoing, it is evident that the OTP func-tion in Teva faces plenty of challenges. At the same time, smart tax technology implementation provides signifi-cant opportunities too. As per usual, any initiative such as this deserves appropriate considerations.23 The following sections explore the development of the OTP innovation strategy from inception to operational implementation.

5.3. Conceptualizing the OTP strategy

After recognizing that OTP technology can benefit the organization, it is necessary to establish how and where these benefits can be realized. A useful step in this thought process could be to map all relevant TP processes, sub-pro-cesses and organizations connected to them. The TP life-cycle, as discussed in section 3.2., provides a very relevant guide. An in-depth analysis of the lifecycle will also iden-tify the touchpoints with different departments (commer-cial, IT, HR, etc.) and interests (internal compliance pro-grammes (local/global). Although each case study and TP lifecycle are different, Figure 1 (see section 3.1.) provides a broad example of the different business partners and functions and the need to integrate them into the process.

In addition, the different functional IC transactions should be listed too. Specific challenges and opportuni-ties will apply here. A useful way to interpret these in the context of an OTP project could be: – Volume. This demonstrates the frequency and value

of transactions and thereby provides an indication of their priority and repeatability (or automation poten-tial); and

– Complexity. This indicates the data requirements for a specific IC transaction calculation and hence rep-resents the difficulty of translating it into a techno-logical solution.

The outcome of the conceptualization process could be a (road)map, timeline or table, in which the TP process and innovation methodology can be captured.

Figure 6 provides an example of such an outcome.

Figure 6 shows a matrix that captures the different TP processes on the left side, factors and developments on the right side and the measures of IC transactions on the horizontal and vertical axis. Further, each quadrant shows Teva’s technology implementation stage.

21. So that production can be ramped up when required by healthcare developments.

22. That is, more quickly than the typically rigid Excel models.23. For example, the organizational context means that any improvement

project needs a broad approach and requires both organizational and technological input.




For Teva, the most routine transactions were already defined and standardized by the OTP team. An increased volume of these provided further motivation to support the transition to an automated technology solution. Further, this would require less effort and bring higher benefits than automating more complex, lower-volume transactions. Hence, emphasis was placed on automating these routine IC transactions first.

For the more complex transactions, however, it was con-cluded that there is a more evident tax risk. Ultimately, an OTP solution could help decrease this risk. At the same time, an increase in volume would mean a greater need for coordination, and from there perhaps a need for tech-nology.

Thus, in the example of Teva, it is clear how a relatively straightforward conceptualization not only helps in selecting the innovation methodology, but also in priori-tizing the stages of the process. Teva follows a step-based approach:

(1) Identification of the process: Process steps, fre-quency, volume.

(2) Coordination of the process: From this follows that a process defined on headlines can be executed dif-ferently across entities, or take into account many exceptions. In order to document this in detail, the process should be coordinated centrally.

(3) Standardization of the process: Once a thorough understanding of the process has been achieved through coordination, common denominators and key inputs will be available. In other words, standard-ized process steps can then be defined (alignment of timing, codifying of exceptions and universal tem-plates/models).

(4) Automation of the process: With standardized process steps defined, the design and development of a technology solution will be easier as the require-ments are already clear. The automation is simply a codification of the standardized process steps.24

24. It will be a matter of translation, i.e. from Excel formulas to code.

5.4. Technology and the OTP function

Alongside determining the big picture and identifying the extent to which processes are ready for technology imple-mentation, it is important to understand the organiza-tion and its readiness for change. Who should the technol-ogy support and who will support the technology? In this respect, it is important to understand the current state of the organization and of the OTP function in particular. Moreover, the future state of the company and develop-ments in the tax/TP legislation again return as important considerations.

It is apparent that local tax authorities are increasingly using technology in their audits. Moreover, the data transparency and sharing requirements for MNEs are increasing through the introduction of new legislation (see section 2.). In response to this, OTP is becoming an increasingly specialized position with connections throughout the finance organization.25 In this regard, it should be considered whether the OTP function is actu-ally defined in the corporate HR matrix, or just assigned to a few people across different departments.26 In the latter case, the organization should be aware that the imple-mentation of technology would put additional strain on already thinly spread staff. A refocusing of the OTP func-tion might therefore be considered, as it would allow a more efficient use of resources. Finally, as with any IT implementation, IT teams and support will start to play an increasingly important role in developing, testing and maintaining the processes. They are, as such, important stakeholders in the push for OTP technology.

Considering both the organizational context (internal) and external developments in TP, the motivation for the development of smarter solutions to manage TP becomes apparent (see Figure 7).

This could be considered as the guiding principle and core argument for further developing both the OTP function and the technology supporting it. From here, a common technology platform, mentioned in the first functional layer of an OTP solution in section 4.3., as well as an orga-nizational adoption of OTP, can easily be considered to

25. Local contributors may be found in the accounting, tax and other finance teams.

26. In the latter case, the OTP function becomes particularly susceptible to “hero-dependency”, as described in section 4.2.

Figure 6 – OTP Implementation roadmap




contribute not only to cost savings but also to significant improvements in compliance.

5.5. Implementation

The foregoing sections have identified the processes that could be implemented by means of technology, the oppor-tunities within the context of the company and the exter-nal factors driving the need for a rethinking of the OTP function. It has also shown the importance of technology fit to the overall landscape of the organization.

Assuming that this analysis reveals an organization’s need to make use of technology in its OTP functions and a will-ingness to implement it, the next obvious step is execution of the plans and concepts.

For Teva, it was important to align the most important stakeholders in the OTP processes, such as accounting, commercial finance, tax, and IT departments, to establish management of the programme. In addition, it was neces-sary to establish an implementation platform and, in addi-tion, an OTP support team. With regard to the latter, it was observed that there could be opportunities to model this after, or connect to, other centralization initiatives, such as shared service centres or centres of excellence. Con-nected to the management of the programme, and as best

practice, a transparent programme operating model with clear capabilities was defined (see Figure 8).27

The next consideration was the technology. In truth, sim-ilarly to the vast majority of MNEs as described in section 4.2., Teva used and still uses Excel spreadsheets to conduct parts of the OTP process. The Excel models that are cur-rently in place can be considered technology as well and could be a very good fit for any operational calculation. However, the limitations and data challenges described created the need for more robust solution.28 Furthermore, given the number of operational processes and functional transactions observed, Teva decided to roll out different modules for each IC/functional process, which will ulti-mately talk to each other in a similar platform language.29 Another advantage of this is that a phased implementa-tion approach can be pursued, thus spreading costs and resource requirements over a longer period, allowing more f lexibility in the design of the new technology plat-form. This ref lects the alignment of Teva with the leading practices regarding OTP implementation, aiming to guar-

27. Illustration provided by Teva.28. The tipping point for Teva was the maximum amount of data that the

spreadsheets can hold: when the transactional volume went up, or when it became necessary to represent different functional transactions (i.e. segmented P&L reports) by bringing different datasets together, Excel could not hold the required amount of data, or the processing of it slowed down the user’s laptop. As a result, a more complex and power-ful technological solution became necessary.

29. Building up the segmented P&L step by step.

Figure 7 – Motivation for developing a smarter solution

Figure 8 – Capturing program goals and objectives




antee the scalability of the application and the f lexibility to adapt to both internal and external drivers.

The TP lifecycle provided the conceptual baseline for the OTP technology implementation and, as the routine dis-tribution operations were already highly standardized and created large retroactive IC adjustments, it was deter-mined that the adoption of new technology to improve process efficiency and accuracy would be the highest priority. The business case focused primarily on the effi-ciency, business value and cash leakage benefits. This was captured in different process innovation phases: initially the programme focused on: (1) establishing a future technology platform/stack;(2) setting up the OTP organization; and(3) implementing a software solution for the execution

of the transfer price adjustment and transfer price setting processes for LRDs.

The outcome of the first innovation phase was that for each LRD the company would be able to calculate transac-tions with its ICP by providing SKU gross profit-level data, as well as a detailed P&L with a standardized account and business unit structure.30 The functional layers described in section 4.3. were consistently applied in the design and architecture. This system, with limited user input (first layer – TP database), would be able to recognize differ-ent functional transactions, apply the TP methodology31 and calculate both transfer prices and retroactive adjust-ments (second layer – TP data model; third layer – calcula-tion engine).32 A business intelligence module and various reporting tools then display the outcomes in almost any way the user wants. In this way, different reports could be drawn up for tax directors or for accounting and finan-cial teams using the same source data and system (fourth layer – data analysis and reporting).

It is envisioned that this system will be expanded in future phases, to cover:

– TP documentation. As there is already a clear link to providing data input for TP documentation, i.e. the different functional transactions are already recognized and calculated, running the system with year-end P&L statement would provide input for the tested transactions (fifth layer – data write back) and, as the scope is mainly limited to LRDs, there could be a connection with the company’s master-local file structure.

30. Connections to different enterprise resource planning (ERP) systems remain in the development pipeline, but have a lower priority, as there is another IT push to replace ERP systems with a common instance.

31. Which has been codified so that it can be straightforwardly updated by the TP team (business not IT).

32. Both follow about the same methodology: the transfer prices are set using budgeted financials, whereas the adjustments are calculated using actuals.

– Other functional transactions. These could be included by means of further modular additions to the platform. It is envisioned that calculations for service, manufacturing functions and even royalties can be implemented. As more functional IC trans-action modules (building blocks) are put in place it will become easier to automatically generate the seg-mented P&L for more complex group companies (see section 3.2.). This will provide even greater efficiency and compliance gains.

In Teva, the technology implementation in the OTP func-tion is still ongoing, and it is recognized that this might take a while, specifically because of the wide range of pro-cesses and departments that are impacted. Therefore, in parallel, a support organization and OTP Center of Excel-lence is being expanded, going from regional experts to a central team that, besides having a tax/TP background, will also be able to provide support on IT system-related questions. The overall effect of this shift is that central OTP resources are growing, while local tax and account-ing teams need fewer resources for their TP compliance work, thus resulting in (hopefully) a net-zero balance (including software implementation costs).

6. Conclusions

This article set out to evaluate the opportunity pre-sented by technological progress in the context of a more complex tax and TP environment. MNEs operating in an increasingly globalized world are already facing a signif-icant challenge in managing their complex and diverse supply chains. At the same time, technological advances contribute to more data generation and availability than ever before.

This presents MNEs with an interesting situation: on the one hand, tax authorities require more data transpar-ency and have access to more data. This is a challenge, as it leads to an observed increase in compliance require-ments and audit risks. On the other hand, the increased data availability presents an opportunity. With the use of tax technology, or, as covered in the article, OTP technol-ogy, MNEs can create greater data transparency, resulting not only in being a more compliant tax citizen but gener-ating resource efficiencies at the same time.

We have explained that regulatory and other external factors and internal efficiency motivations are driving the adoption of new technologies. Transactional tax func-tions such as TP are already generating and processing a lot of data. Hence, the adoption of technology can provide significant benefits in these functions. The OTP function will increase in its importance and merits specific atten-tion. It could be the key for successful adoption of TP technology, as demonstrated through both a theoretical approach and a business case example.




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