Operational Transfer Pricing Is Now - KPMG · Operational transfer pricing ( “OTP”) is focused...

2019 U.S. Cross-Border Tax ConferenceMay 14 – 16, 2019

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Operational Transfer Pricing Is Now

2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761

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The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Notices


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Today’s presentersName Title Firm/

Company NameEmail

Pravin Ugalat Principal, National OTP Leader,EVS Transfer Pricing KPMG [email protected]

Brian Trauman Principal, National Transfer Pricing Leader, EVS Transfer Pricing KPMG [email protected]

Derek Wong Senior Manager, National OTP, EVS Transfer Pricing KPMG [email protected]

Chris Schulman Senior Manager, National OTP,Tax Ignition - Data & Analytics KPMG [email protected]


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Identify how to effectively manage transfer pricing challenges in today’s world, and discuss examples of how countries around the world are responding to U.S. tax reform and transfer pricing implications.

Learning objective

AgendaWhat is OTP?

What is driving the need?

What can OTP achieve?

How OTP technology and tools have evolved as data needs have increased

How to approach an OTP project

01

02

03

04

05

What is OTP?

OTP is Now


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The transfer pricing lifecycle begins with organizational change, and the development of a global value chain that predicates the intercompany transactions. From there, the intercompany transactions are implemented and recorded with the company’s financial records.

Plan DefendImplement Document

Analyze acquisition integration and/or

organizational change

Identify and initiate intercompany transactions

Design value chain

Identify intercompany flows

Establish pricing and calculate transaction

costs

Perform accounting and reporting

Manage, maintain and monitor compliance

Prepare global documentation

(Masterfile and local files)

Prepare Country-by-Country

Reporting

Prepare exam defense

Explore and prepare advanced pricing

agreements

Complete competent authority

AND/OR

AND/OR

Harness data captured throughout the lifecycle as a strategic tool for scenario analysis

Reviewing the transfer pricing lifecycle


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Operational transfer pricing ( “OTP”) is focused on the implementation phase of the transfer pricing lifecycle, and represents the calculation, reporting and booking of transfer pricing calculations. Recently, large multinationals have been utilizing OTP as a strategic tool to perform analytics and scenario analyses.

Plan DefendImplement Document

Analyze acquisition integration and/or

organizational change

Identify and initiate intercompany transactions

Design value chain

Identify intercompany flows

Establish pricing and calculate transaction

costs

Perform accounting and reporting

Manage, maintain and monitor compliance

Prepare global documentation

(Masterfile and local files)

Prepare Country-by-Country

Reporting

Prepare exam defense

Explore and prepare advanced pricing

agreements

Complete competent authority

AND/OR

AND/OR

Harness data captured throughout the lifecycle as a strategic tool for scenario analysis

Defining the transfer pricing lifecycle


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The stages of the end-to-end OTP continuum

The identification and initiation of the intercompany transactions in alignment with the global value chain, including the transfer pricing policies.

KEY ACTIVITIES

Identify full list of intercompany transactions and validate transfer pricing policies.

The process of establishing a price for the intercompany transactions in accordance with the transfer pricing policies, and the calculation of the transfer pricing charges.

KEY ACTIVITIES

Source financial and supporting data required to calculate transfer pricing charges.

The performance of the financial processes to account for and record the calculated transfer pricing charges.

KEY ACTIVITIES

Entry of transfer pricing charges into the accounting records

Generate post-transfer pricing reporting.

The monitoring of transfer pricing charges to ensure compliance with transfer pricing policies and the company’s strategic tax goals.

KEY ACTIVITIES

Leverage reporting to reconcile and validate transfer pricing charges to projections and documented policies.

Identification and initiation

Pricing and costing

Record to report

Manage, maintain and

monitor

The implementation phase of the transfer pricing lifecycle – the OTP continuum – is comprised of four stages that span the identification of the intercompany transactions through to the recognition of the transfer pricing charges within the company’s accounting records.


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Typical primary stakeholders

Accounting

FP&A Treasury

TaxInternal Audit

IT Trade & Customs

Legal Entity Forecasting

Data Availability & Integrity

Journal entries, intra-group profit elimination and consolidation

SALT, R&D, LE Valuation calculations leverage similar data

Internal Controls

Customs impact to changes in transfer

pricing

Cash Management & Loan Covenants


OTP is Now


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Tax Audits &

BEPS

Management

Reporting & KPIs

Tax ReformGlobalization



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Residual Cost + Cost + Target Margin Residual Cost + Cost + Target MarginP&L FORECAST Mfg and IP DC Processor Distributor Mfg and IP DC Processor Distributor

Sales - customers 800 800Sales - intercompany 1,000 1,000 1,000 550 650 700Sales - intercompany discount (450) (350) (300) 0 0 0Revenue - Net 550 650 700 800 550 650 700 800

Cost of goods sold - 3rd party (300) (300)Cost of goods sold - intercompany (300) (300) (300) (300) (300) (300)Cost of goods sold - intercompany markup (250) (350) (400) (250) (350) (400)Cost of goods sold - Net (300) (550) (650) (700) (300) (550) (650) (700)

Opex (20) (80) (30) (60) (20) (80) (30) (60)

Operating profit 230 20 20 40 230 20 20 40Operating margin 42% 3% 3% 5% 42% 3% 3% 5%

REVENUE DISCOUNT METHOD COST PLUS METHOD

Globalization: complex supply chains


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Globalization: entity segmentation

Limited Risk Distributor Service 1 Service 2

Entity 1

Trading Partner 1 Trading Partner 2 Trading Partner 3 Trading Partner 4

— How do you divide an entity’s financials into multiple segments? — Is there something in the data that can be used (eg: profit center, cost center)?— Is an allocation necessary?


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Tax audits & BEPSIn September 2017, the OECD published a handbook that provides guidance as to how tax authorities receiving CbyC reports might use this information within their respective tax risk assessment programs.

— Handbook identifies 19 specific risk indicators that tax authorities should consider when reviewing CbyC report data, including:- The group’s footprint, the ratio of unrelated to related party revenues,

and whether results in a jurisdiction deviate from potential comparables— Handbook also identifies key ratios which tax authorities should use to

evaluate CbyC report data, including:- Profit margin, effective tax rate, revenue or profits per employee, and

pre- and post-tax returns on equity, among others— Handbook encourages the use of benchmarking to evaluate taxpayer data

- Taxpayers may be compared to unrelated companies orindustry averages

- Taxpayers’ performance may be evaluated in light of trends in the relevant jurisdiction

KPMG expects global tax audits

to increase 50-100% over

the next 2 years.


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FTC Limitation / Utilization

Subpart F Income

BEAT

Section 163(j)

Taxable Income /

NOLs

FDII and GILTI

• Foreign tax credits

• Built-in loss / deficits

Section 163(j)

E&P Adjustments

Subpart F / Section

956

GILTI

Income

Cash Management

U.S. Level

CFC Level

Taking advantage of key attributes (foreign taxes, built-in losses, excess FTC limitation, FDII, etc.) can have a

significant impact on global ETR

Legal entity and / or supply chain planning can create opportunity

Modeling

The significant interaction between the rules requires detailed modeling at both the CFC and US shareholder levels to determine the bottom-line global tax impact of tax reform and potential

planning. You can’t rely on intuition!

Tax reform


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—Changing tax requirements have increased the need for separate legal entity reporting and forecasting

—Tax departments struggle to get assistance from finance to create a “transfer priced” legal entity forecasts since there is often disagreement between finance and tax departments about who addresses legal entity reporting needs

—Companies have had to compromise and consider alternatives such as separate tax data warehouses

—Tax departments need to perform scenario planning more efficiently due to a dynamic tax regulatory environment

What are we hearing from CTOs?

What can OTP achieve?

OTP is Now


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ROI – soft benefits & value propositionsEfficiency GainSignificantly reduce manual efforts and process turn-around and cycle time

ROI & SavingsRapid deployment and reduction in manual hours up to 60–70%

Process controlsTraceable and auditable solutions with robust process controls

CollaborationBetter coordination and collaboration among various stakeholders

Scalable DesignBuild scalable solution through flexible and modular designs

Risk MitigationReduce risk through standardized template reduction of manual efforts

Accuracy & ReliabilityEnhance process accuracy & reliability by augmenting review

Driving InsightProvide a platform for impactful analytics and reporting

Build Tax Department of Future

How OTP technology and tools have evolved as data needs have increased

OTP is Now


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Data visualizations• Power BI• Tableau• Qlik

Database solutions• Access• SQL Server

Manual desktop• Excel Desktop data

transformation• Power Query• PowerPivot• AlteryxERP based solutions

• Oracle• SAP

Manual Solutions• Risk-prone• Not scalable

Enterprise Solutions• Most robust & powerful• Expensive to implement & can

lack necessary flexibility

“Democratized” Solutions• Robust & powerful• Faster/cheaper to implement

> 10 years ago 5 - 10 years ago < 5 years ago

Off-the-shelf solutions

Evolution of OTP technology tools


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Technology OptionsCustom

D&A ToolsVendor

Application ERP

IT Environment

Guiding Principles

Cloud vs On-Premise

FunctionsData and Logic Stakeholders

Development Timeline Management vs Legal Entity Forecast

Tax Reporting, Planning, Compliance and Audit

Internal vs Outsourced vs Offshore P&L Segmentation SOX Controls

Data Volume, Granularity and Quality

Existing Technology Licenses

Multi-User and Location Access

Resources and BudgetsMaster Data GovernanceEnterprise Technology Roadmap

Calculation Transparency

Alignment with Finance Initiatives

Multiple ERP and Sub Systems

TP Model Integration and Interdependencies

Indirect Tax and Trade/CustomsSupport and Maintenance

Workflow Capabilities

IT Policies and Procedures

Analytics and Visualization

User Interface Preferences

Roles and Responsibilities between Acctg and TP

Centralized vs Decentralized

Complex Supply Chain

Profit in Inventory

Flexibility and Scalability

User Configurable

Factors affecting technology decisions

How to approach an OTP project

OTP is Now


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• Understand the supply chain • Understand intercompany transactions• Understand the pain points (data limitations, quarter-end / year-end

processes, team dynamics) • Understand current people and processes• Understand data flows • Present a value proposition (return on investment, cost benefit,

risk mitigation, etc.) to management to seek funding

Prior to implementation


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Example people model

Corporate Tax and Legal

Attributes of Successful

Transfer Pricing Implementation

Transfer Pricing Strategy and

Policies

AccountingBusinessAlignment

ControllersGeneral Managers

Systems and Tools

Information Technology Services


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Example service delivery model

Stan

dard

Org

aniz

atio

n M

odel

Standardize processing and efficiencies of scale

Centralized/Corporate

Local

Corporate Consolidations &

Reporting

Intercompany Center of Excellence

Tax Strategy and PolicyCorporate &

CoE Layer

Regional Shared Service



Global Shared Service

Shared Services Layer

BU/ Hubs/

Country

BU/ Hubs/

Country

BU/ Hubs/ Country

Local Resource Layer


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Current State Assessment

Requirements Gathering

Solution Design

Develop

Test

Deployment

Release Management

Transition to Steady State

Continuous Improvement

Target Operating Model and Roadmap

BUILDROADMAP DESIGN MONITORIMPLEMENT

Framework for development & implementation

Questions

Thank you

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

Operational Transfer Pricing Is Now - KPMG · Operational transfer pricing ( “OTP”) is focused...

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