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Multinational corporations face compliance challenges in 2021 as intercompany agreements and transfer pricing come under increased scrutiny by hawkish tax authorities.

The OECD estimates intra-group transfers make up more than 60% of world trade, underlining why tax authorities globally are taking greater enforcement to prevent intercompany transfer pricing being used to reduce the tax burden of the parent company.

The underlying arms-length principle of transfer pricing is that the price should be at a fair market price, as if the companies weren’t connected. For example, the US Internal Revenue Service (IRS) says that transfer pricing for intercompany transactions should be the same as if the company had completed the same transaction with a third party or customer outside the group. And UK legislation allows only for a transfer pricing adjustment to increase taxable profits or reduce a tax loss – not to decrease profits or increase a tax loss.

The potential consequences of being found guilty of failing to comply with these rules include fines and restating financial results. Tax experts also predict that authorities will increase transfer pricing scrutiny this year. Many countries, including the UK, suspended transfer pricing audits and investigations during 2020 as the pandemic hit. However, the UK’s HMRC relaunched its and sent warning letters to multinational companies asking how confident they were that their transfer pricing was “appropriate”.

An analysis of 2020 transfer pricing tax cases shows key trends in investigations by tax authorities. This includes a focus on goods and intangibles transactions in the extractives and goods manufacturing/distribution industries. Companies are also falling foul of authorities due to inadequate contemporaneous transfer pricing documentation.

Combined, these factors put increased pressure on already stretched finance and accounting departments. In fact, Gartner puts managing tax liability and facilitating transfer pricing as one of the many key activities for finance leaders.

The challenge for accounting functions in ensuring transfer pricing compliance across the group is that the process remains highly manual and time-consuming, particularly checking for and identifying changes in intercompany activity requiring changes to transfer pricing tax percentages. One way organizations can tackle this transfer pricing compliance challenge is by employing finance automation to eliminate manual errors by automating the calculation of transfer prices and perform automated controls and checks more frequently, even daily if necessary.

For example, global dairy organization Arla Foods implemented finance automation to help increase transfer pricing compliance across the group, using a solution expanded from the successful automation of its journal entry and intercompany processes. Automating transfer pricing controls and checks was a new process for the Arla Foods finance team, otherwise requiring at least one full-time employee to carry out checks manually. Automating the process Arla Foods not only makes more efficient use of its finance resources, but also allows the company to run the transfer pricing checks monthly instead of just once a year.

The Redwood finance automation software performs P&L checks for each entity within the Arla Foods group, leveraging the Arla transfer pricing policy which ensures compliance as a check against the actual result, and generating a journal for adjustment if needed.

The result for Arla Foods is greater confidence in the accuracy of its numbers and the documentation to support its transfer pricing calculations. Automation has improved control and governance of compliance with transfer pricing policies across the entities within the Arla Foods group. The tax team was also enabled to standardize and centralize transfer pricing calculations, which reduces the risk of policies being implemented differently within the group.

Christel Møller Broch Jensen, senior accounting specialist at Arla Foods, said: “It’s that confidence that you have taken everything into account, you have checked it and if it changed you changed it in a timely manner.”

Arla Foods now plans to enhance the transfer pricing automation, first with further controls and checks and then authorization of the service fee calculation and payment.

About The Author

Darrell Maronde's Avatar

Darrell Maronde

Darrell Maronde is the Senior Product Marketing Manager for Redwood’s workload automation solutions. He has more than 15 years of product marketing experience with on-prem and SaaS software, including solutions for IT and operations.