Operational Transfer Pricing

Webinar on Transfer Pricing

Contact information
Get in contact!

Asger Mosegaard Kelstrup Jesper Aagaard Rasmussen

Transfer Pricing Partner Transfer Pricing Partner

Email: akelstrup@deloitte.dk Email: jrasmussen@deloitte.dk

Mobile: +45 3093 4596 Mobile: +45 3093 6785

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Agenda

The agenda for today

1 A glimpse into the transfer pricing life cycle

2 Focus on transfer pricing process and controlling

3 Example on how to gather data and prepare a proper process for transfer pricing calculation

4 Technology-based transfer pricing process

5 A look on how to prepare for transfer pricing adjustments and COVID-19

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Transfer pricing life cycle
The starting point!

Ongoing

Tax Strategy TP Planning Operational Transfer Pricing TP Compliance

Business review Economic Comparability

Process and
IC agreements / transaction analysis analysis / Audit defence
controlling
analysis calculation benchmark

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Transfer pricing process and controlling
The time is now!

Operational transfer pricing is about ensuring an accurate, transparent and efficient implementation of transfer pricing policies in the books and records of a
company based on quality data and robust processes and controls.

Data Processes People

• Tax sensitised data with necessary data • Strong audit trail with clear • Correct skills set (tax, finance, IT) for
dimensions, suitably validated. responsibilities across functions. now and the future.
• Ability to easily incorporate and • Clear and timely monitoring and • Clear alignment on objectives.
manipulate disparate data sources. adjustment processes.

• All blocks supported by appropriate technology solutions tailored to fit within, and complement, every
businesses’ IT environment, strategy and roadmap.
Technology
• Automating manual, repetitive and low value-added tasks.

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Transfer pricing process and controlling
Typical challenges and pain points

You need to understand the GL account/cost centre structure, including guidance for Indonesia
booking, to ask the relevant questions: “The Indonesian TP regulations do not provide specific guidance
on year-end adjustments. Based on our experience, the DGT
• What costs and revenue are booked in the GL accounts relevant for tends to scrutinise such adjustments with great detail and seek
intercompany? for supporting documents in respect of such adjustments,
especially downward adjustment (e.g. whether intercompany
• Are the bookings (revenue and costs) only relevant for intercompany agreement contains such provisions, background, etc.)”
purposes?
Malaysia
“In Malaysia, while there is no specific prohibition on true-
up/down, the following need to be noted:

1. Ideally, all YEA should flow through the books (on-the-

Important areas to discover books), since the return must be prepared based on audited
financial statements. Off-the-books downward adjustment to
taxable profit is generally disallowed in audit.
• Can we identify the intercompany revenue and related costs and perform an 2. Agreement must provide for such YEA.
economic analysis for the transfer pricing documentation? 3. The IRBM generally scrutinises year-end downward book
• Can we align the data between recipient and provider and how do we tackle adjustments more from perspective of characterisation of
the local entity, clause in the intercompany permitting such
bulk-adjustments for elimination purposes? adjustments and year-beginning price setting process to
• How should we book year-end adjustments, and can it be done in the country? achieve desired arm’s length results”.

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It all starts with data…
Example of calculating a service fee
Can the service income
Data gathering - GL account details be aligned with the
Number Description Value (DKK) service cost at the
1-001 Cash 1,573,000 recipient?
1-002 Account receivable 4,500,005
1-003 Current assets 1,450,777
1-004 Fixed assets 450,746 Can we allocate the
1-005 Equity 388,642
expenses to the services
1-006 Payables 4,876,097
1-007 Loans 2,709,789 provided?
4-001 External revenue 250,973
4-002 Internal revenue 10,988,150
4-003 Advertising expenses 756,937
4-004 Renting 1,514,940
4-005 Social benefits 987,789
4-006 Salaries 22,284,518
Are all relevant salaries
4-007 Supplies expenses 874,000
4-008 Depreciation 489,879 for the services
4-009 Other expenses 1,937,009 provided booked at the
right GL account?
Data analysis - Determining the cost base
Total costs Amount
Overhead 5,803,617
Salaries 22,284,518
Can we divide the
salaries on the functions
performed?

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… and then processes must ensure that the data is used properly
Example of calculating a service fee

Data analysis - Splitting the cost base to functions

Function Salaries Overhead Total In scope?
Direction 862,705 224,676 1,087,381 Exclude
Finance 3,837,476 999,404 4,836,880 Include
Human Resources 6,498,083 1,692,313 8,190,395 Include
Remember the
Information Management 9,371,290 2,440,590 11,811,880 Exclude benefit test of the
IT Services 1,090,438 283,986 1,374,423 Include recipient
Legal 13,771 3,587 17,358 Include
Marketing 610,755 159,061 769,815 Include

Data analysis - Allocate the proper costs per recipient

Function Total Cost Pool SH Cost Total charge-out Allocation Key Company Y Company Z Company YZ Company ZZ
Finance 4,836,880 35% 3,143,972 Revenue total 2,428,853 208,137 277,924 214,839
Human Resources 8,190,395 35% 5,323,757 Headcount 3,443,394 688,679 530,013 273,446
IT Services 1,374,423 50% 687,212 Revenue total 530,901 45,495 60,749 46,960
Legal 17,358 50% 8,679 Revenue total 6,705 575 767 593
Marketing 769,815 35% 500,380 Revenue external 414,849 - 48,240 37,290
Total 7,761,008 1,023,120 1,024,830 655,948

Transfer pricing analysis - Calculate the transfer pricing

Company Y Company Z Company YZ Company ZZ
Total costs 7,761,008 1,023,120 1,024,830 655,948
Mark-up 388,050 51,156 51,241 32,797
Service fee 8,149,058 1,074,276 1,076,071 688,745

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Finally, the data must be presented in the transfer pricing documentation
Example of how an arm’s length analysis is presented for a service fee

The typical transfer pricing documentation The expectations from the tax authorities

Transaction value Transaction value

Service provider Service recipient Amount (DKK) TP method Service provider Service recipient Amount (DKK) TP method
Company X Company Y 8,149,058 TNMM NCP Company X Company Y 8,149,058 TNMM NCP

Transfer pricing analysis Transfer pricing analysis

A number of comparable companies to the service provider was identified and
The pricing policy of 5% was used for the intercompany transaction. the following arms’ length interquartile range was calculated:

In accordance with Section 6(4) of Danish Executive Order no. 42 of 24 Interquartile range NCP 2014-2016 W.AVR.
January 2006, no search for similar service arrangements among Lower quartile 3.50%
unrelated parties intended to document the arm’s length nature of the
Median 4.90%
transaction has been performed.
Upper quartile 5.85%
Based on the above and thanks to the ability of the service provider to
determine the correct cost base, it is the opinion of Group A Net Cost Plus of 5.01% could be calculated for the services provided.
Management that the prices paid by the Group companies have been
Actual figures Tested Party
set in accordance with the arm’s length principle.
Revenue 8,149,058
Costs 7,761,008
Profit 388,050

Due to the above, it can be concluded that the prices paid by the Group
companies have been set in accordance with the arm’s length principle.

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Summary of process and controlling
Establishing a proper framework

Analysis Plan Executive

• Define intercompany transactions in scope • Define process for data gathering and calculation of • Gather data and apply calculation methodology
• Understand the policy and data needed (i.e. cost prices • Controlling of TP policy and actual data (based on
types, gross margin, standard cost, deviations) • Define process for analysis of calculated prices vs. frequencies decided upon)
• Assess chart of accounts and data available TP policy • Execute on control of controlling process
• Decide on basis for calculation (Excel, ERP module, • Define process for record to report (i.e. invoice for
separate software) intercompany transaction)
• Understand AS-IS processes for intercompany • Define ambitions for controlling and tax controls
calculation and invoicing (including frequencies)

ERP data TP Policy Process Tax return

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Next step in the journey could be to let technology enable the processes…
…but Excel can also be used if process is followed

Source Systems Reporting/Analytics Tools

Applications ERP

Cloud Connectors

Connectors
Tax Compliance

Databases Transfer Pricing Analytics

calculation
Power Exchange
Connectors Data Integration
& Reporting

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High data quality and technology enabled transfer pricing can take you even further
The future of tax controlling and monitoring

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Annual cycle for transfer pricing purposes
The controlling process must be included in the combined transfer pricing annual cycle
2 Year-end adjustments and information gathering meeting re. transfer pricing
documentation (December)
3 Year-end adjustments and preparation of transfer pricing
• Identification of 11+1 realised margins for the tested parties. documentation (January)
• Identification of entities to be adjusted in order to receive remuneration within the
• Identification of the realised margins for the tested
interquartile range determined in the benchmark analyses.
parties before closing the books. Year-end adjustments
• 11+1 year-end adjustments to be performed. are performed similar to the adjustments done in
1 Identification of intercompany transactions and preparation of
benchmarks (November) • Information gathering to start preparation of the transfer pricing documentation. December.
• Identification of intercompany transactions for the existing FY. • Initiate preparation of transfer pricing documentation for
the preceding FY.
• Preparation of benchmarks to determine arm’s length prices for 2 3
the intercompany transactions regarded significant in nature.
1 Possible year-end adjustments and preparation of
4
transfer pricing documentation (February/March/April)
8 Assessment (October) • Identification of the realised margins for the tested
parties in the preceding FY after ended audit process.
• Assessment and anticipation of transfer pricing specific issues 8
4 Year-end adjustments are performed similar to the
for the company based on the first three quarters for the FY. adjustments done in December, in case reclassifications
• Evaluate any changes compared to the preceding FY. Ongoing etc. have led to realised margins outside the interquartile
dialogue and range.
sparring
• Information gathering for the transfer pricing
documentation for the preceding FY.
7 Planning (August/September) • Finalisation of transfer pricing documentation (if
possible).
• Planning for the next 12 months. 7
• Meeting with Deloitte to coordinate transfer pricing processes • Controlling and possible adjustments for Q1 in the
and manage expectations for the existing FY. 5 existing FY (around 20 April).
• Impact assessment of new laws and proposed legislation.
6
5 Review (May)
6 Tax return (June) • Check whether there are any unresolved issues or outstanding
• Submission of tax return(s) on 30 June (at the latest) in Denmark, unless the information regarding the transfer pricing documentation and
deadline is extended. solve these.
• Final review of the transfer pricing documentation.
• As of FY2020, a proposed bill in Denmark suggests that the transfer pricing
documentation should be submitted to the Danish Tax Authorities no later
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Covid-19 Transfer Pricing Adjustments
Difficult times, extraordinary measures

• Unprecedented economic crisis following C-19 has had an instant impact on economic results, affecting
the benchmark profitability ranges under the arm’s length standard
• Need for adjustment of transfer pricing policies now, revisit APAs and intercompany contracts to cope
with the impact of C-19 and navigate such challenging times

• Any transfer pricing changes for 2020 cannot be supported by regular benchmarking as 2020 data will
not be available until mid-2022 and historical data benchmarks would not be viable because previous
years data do not readily reflect the crisis
• Data and evidence-driven analyses consistent with the arm’s length standard would be needed to support
any changes made to TP policies for 2020

Different approaches to construct benchmarks capturing C-19 impact

Conventional data adjustments Econometric regression analysis

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