Operational Transfer Pricing: Recognising OTP Principles and Optimal Methods

The first comprehensive restrictions were introduced by US tax authorities in the 1960s, marking the beginning of transfer pricing. Still, there has been a dramatic change in the terrain. The current complexity of transfer pricing is largely a result of increased competitiveness in the global arena, changing company models, and mounting pressure on corporation tax rates. Ensuring accurate transfer pricing is crucial in today’s globalised market with intricate supply chains.

Operational Transfer Pricing (OTP): What is it?

OTP is the process of correctly integrating transfer pricing policies into the daily financial and accounting processes of a multinational enterprise group. The main concern is ensuring that the agreed-upon rules result in actual financial outcomes that meet the arm’s length criterion.

Using the Transfer Pricing Lifecycle to Understand OTP

OTP concentrates on the implementation phases of the transfer pricing lifecycle. One aspect is setting transfer prices, the basis for business dealings between related firms. These prices are established by arm’s length principles as they are derived from the transfer pricing policy that has been set.

Monitoring involves tracking financial results to ensure they comply with regulations. Periodic true-ups are called adjustments, and they are done to make sure the results fall within an arm’s length range.

Why Is OTP More Important Than Ever Right Now?

Although operational transfer pricing (OTP) has always been important, its significance has grown in today’s complicated transfer pricing environment. Some important causes explain this increased importance.

BEPS 1.0

Launched in 2015, the OECD’s Base Erosion and Profit Shifting (BEPS) project imposed a slew of new paperwork and reporting requirements on transfer pricing. The BEPS Action 13 report developed the three-tiered approach to TP documentation: the Master File, Local File, and Country-by-Country Report (CbCR). Due to these new regulations, tax authorities’ scrutiny and compliance burden for MNEs have significantly grown.

Enhanced Tax Authority Examination

Multinational corporations (MNEs) are under pressure in transfer pricing. Tax authorities are using new tools: sophisticated data analytics that closely examine transfer pricing information and Country-by-Country Reports (CbCR). There is also a trend in collaboration through information sharing and collaborative audits. Robust Operational Transfer Pricing (OTP) processes are now essential for MNEs to manage risks and successfully defend their transfer pricing positions in this changing market.

Complexity of Operations

Due to their global expansion and adoption of novel business strategies, Multinational Enterprises (MNEs) engage in more complex and frequent intercompany transactions. Export/Import are becoming digital networks with moving elements that are always changing. The increasing significance of services and intangible assets adds to the overall complexity. As a result, it is harder to create and maintain explicit transfer pricing (TP) norms. Operational Transfer Pricing (OTP) cannot keep up with technological advances. It is a manual process.

BEPS Version 2.0

With its two pillars (global minimum tax and tax rights reallocation), the OECD/G20’s BEPS 2.0 framework promises a major revision of international tax laws. Specifically, Pillar One will use a formula-based strategy to transfer a percentage of the worldwide income of multinational corporations (MNEs) to market jurisdictions.

Technology’s Place in OTP

The massive volume of financial and operational data that multinational enterprises (MNEs) produce for transfer pricing is too much for old manual techniques in today’s data-driven environment. The outdated ERP systems lack the depth required for TP analysis as they were intended for broad reporting. However, technology can be your saving grace.

A TP-specific data model, which unifies and standardises data throughout the company, offers a clear basis for OTP. Using this data architecture as a foundation, advanced analytics and automation may accelerate processes like tracking transactions and producing paperwork. At the same time, thanks to real-time dashboards, tax professionals can take proactive advantage of TP possibilities and risks.

How DataTracks Can Help?

Effortlessly convert your CbC data into XML reports. Our CbCR XML services are utilised by 350 MNEs to prepare their company’s CbC reports in XML format, which are then submitted to over 20 tax authorities worldwide. For more details, please contact us at enquiry@datatracks.co.uk.