The first is to understand the totality of all TP transaction flows and what parties are on each side of each transaction. Once that is known, it becomes easier to identify common parties, which allows taxpayers to bundle multiple transactions into one dispute resolution forum. Consolidating key controversies can be used as a benchmark for negotiated settlements elsewhere.
The second step is to look across jurisdictions for common challenges. For example, a business may observe that several countries continually have large true-up adjustments or require maintaining tax reserves for uncertain TP positions. Businesses need to determine which elements, including data management, poor monitoring, price-setting, exchange rate volatility, or other issues, are contributing to deeper issues that must be resolved. Automating and standardizing data for one country equips the business to better deal with similar issues that arise in dozens of others. This is an exponential leap towards certainty, not an incremental one. “Even if businesses start with small use cases for setting up a data concept considering different possibilities of data sources and internal processes, it will help them exponentially,” says Hanna Moebus, Director, Operational Transfer Pricing, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft (EY Germany).
Every organization should examine all their TP processes through this new lens and ask whether they are linear or siloed (a key symptom of being siloed is keeping decentralized files that cannot be easily accessed or shared). If they are, businesses need to shift their focus to a systemic approach that involves standardizing data, moving up the TP technology curve and ultimately automating, eventually using GenAI or other machine automation. Our experience managing these transformations indicate organizations report saving 30% of all hours spent on TP-related matters in the finance department in a five-year period.
How to harness technology
Data and technology are notable game changers, providing companies with the ability to significantly reduce cost, reduce risk and drive more value. Today’s technology allows companies to ingest data into a data lake, validate the data, transform the data into a common data model, and drive reuse of the data via standard reporting, analytics, and computational engines. Yet, the 2023 EY Tax and Finance Operations (TFO) survey found that 72% of that survey's respondents have gaps when it comes to tax sensitizing their Enterprise Resources Plannings (ERPs). These challenges are magnified when they involve transfer pricing at the product, transactional or jurisdictional level.
Systemic reform is also necessary if businesses want to gain their expected benefits from GenAI. In the survey, 88% of respondents expect TP technology to save their organization money over the next three years. But they also acknowledge they have work to do in the interim — 76% of respondents say they need to have in place a robust TP policy that clearly defines TP processes, while 47% say they need to move data into a centralized repository. Thirty-six percent say they need to improve the quality of their data.
Businesses need a plan to harness the power of data, systems and third-party technology. They can either invest internally with data strategies, tax sensitization of ERPs and systems improvements, or partner with a service provider who has built these capabilities. Another option is pursuing a hybrid of the first two choices. The TP technology curve continues to expand with multiple technology options available. It is important that businesses start to think about their IT infrastructure and how to pull data together from different systems, Moebus says. Once they have tackled standard data questions, technology can readily be deployed.
Ultimately, components of the TP roadmap will reveal where automation cannot help. TP professionals can struggle to keep up with C-suite and business demands. Efficiencies from implementing the roadmap and automation will free up TP professionals to meet more value-added needs of the organization, such as tax authority negotiations and more active participation in R&D and supply chain planning. Better connectivity with the C-suite will also contribute to leveraging GenAI effectively — 69% of respondents say they need to improve their integration of the tax department with a broader business strategy over the next three years to reap the benefits of the technology.