A modernized approach to intercompany transactions: PwC

Principal, Transfer Pricing, New York, PwC US

Rafi Berkson

Director, Transfer Pricing, PwC US

Modernizing intercompany transactions can help multinational organizations succeed through various catalyst events, ranging from market events that put pressure on company’s margins to dynamic tax policy changes. These external events typically have a direct impact on company financial statements in fast and unexpected ways that are difficult to react to in an agile way with legacy processes. Internal intercompany technology, systems and processes are especially sensitive to unexpected external events, since they have a critical impact on legal entity cash flow and on the quarterly tax provision calculation that goes into investor reporting. Complex global tax reform initiatives and the push to reduce post-year-end adjustments in a compressed timeline are applying new pressures to teams with limited resources.

Many tax and/or transfer pricing (TP) teams have unknowingly taken on the role of de facto controllers for legal entity operating profit financials and are struggling to keep up with evolving demands. While legacy processes focused on segmenting financial statements for TP documentation, the current landscape is far more complex.

In this post, we will explore some of the challenges that companies face in today’s business environment, and how robust intercompany processes can be established to meet the demands and unlock value for business leaders.

Quarterly and annual close acceleration

The financial close process has become more cumbersome for a number of companies due to disparate financial systems and more manual entries because of their unique circumstances. These factors have added more stress on intercompany transactions, which are the bridge between Management and Legal Entity financials. However, many TP calculations are rooted in legacy processes that have been patched together over time – after many incremental organic and inorganic changes in the business, the logic can get quite complex due to many unique circumstances layered onto each other. These processes often contain inefficiencies, such as roundtripped charges, multiple pulls of the same data or manual adjustments that could be automated. There may be opportunities to optimize calculation methodologies by applying strategies like developing consistent calculation approaches, setting materiality thresholds and reviewing processes at a higher dimension level.

Key Action: Assess your current processes to identify opportunities for simplification. Look for redundant calculations, roundtrips and areas where manual interventions can be reduced.

Data management

There has been an increase in the amount of data available to finance and tax organizations. However, many companies have not undertaken a review to fully understand the data sources currently used for calculations, which can include a wider variety of sources than you may initially realize. It could start with trial balance-level information from a consolidation platform but then be adjusted with transactional data from one or more ERPs, HR systems and sometimes manual information provided directly from profit center or cost center owners. A number of companies are implementing new technology platforms, data lakes or other solutions that can be used to gather data from these sources without the need to join the data separately for tax purposes.

Key Action: Connect with Finance IT to assess the potential for integrating alternative data sources into your current process – or to use as the building block for a more streamlined process.

Preparing for tax audits with enhanced upstream data quality

Tax authorities have started to add requests for ERP and other company financial information to their standard audit procedures. Given the quality of the system data, TP teams may find it necessary to apply a number of manual adjustments, assumptions and allocations in order to correct for data that is missing at the source. These manual adjustments, assumptions and allocations can raise questions by tax authorities, who may be concerned about the information that is being presented for tax purposes. In order to reduce the need for manual adjustments applied by tax teams, there may be improvements that could be done by the business or IT, such as adding product details to non-product costs, gaining better control over time sheet entries or developing IT reports that join data from disparate data sources before TP calculations are performed. These improvements can often be incorporated into broader business transformation projects, reducing the need for independent TP efforts.

Key Action: Collaborate with IT and business teams to identify upstream data enhancements that align with TP needs and conduct a cost/benefit analysis to implement based on impact to the overall organization.

Intercompany organizational optimization

Effective intercompany processes often depend on having the right team in place to manage calculations. Some organizations have found success by having the process owned by a specialist intercompany team within the finance organization, while maintaining inputs and oversight from the tax/TP teams. This approach can help increase accuracy while reducing bottlenecks and allowing the TP team to focus on more strategic initiatives.

Key Action: Evaluate whether your current team structure is effective for managing TP calculations and consider centralizing these efforts within a specialized Finance team.

Technology transformation

Companies are making significant investments in enterprise technology that may have the potential to automate and streamline intercompany calculations. These technologies often have the modeling capabilities required for complex but flexible transfer pricing calculations or can be integrated with off-system specialized analytic platforms. The breadth of technology options provides companies with the ability to choose a platform that meets the organization’s needs, as opposed to trying to force a system that doesn’t align with the data, technology and people strategy. Ultimately, the goal of a technology platform is to drastically reduce the manual burden on teams that drive current processes and enhance overall controls on the data model.

Key Action: Explore technology solutions available across the company that could be used by tax teams or consider investing in a platform specifically designed to handle TP calculations across multiple systems.

Takeaway

By understanding your data sources, simplifying legacy processes, improving upstream data and leveraging the right technology and team structures, companies can significantly enhance their TP processes. The key is to take a holistic approach that considers the needs of both tax teams and controllership while aligning with broader transformation initiatives. If your transfer pricing processes are creating roadblocks in your financial close, now is the time to evaluate your approach. Connect with your Finance IT team, assess your current processes and explore new technology options to streamline your operations.