Why You Should Consider Upgrading Tax and Transfer Pricing Software at the Same Time

Far-reaching global events are becoming ever more common disturbances for multinational enterprises (MNEs), yet their impacts remain difficult to predict and mitigate. Tax and transfer pricing strategists increasingly need to predict and assess the long-term impacts of various events, such as changes in international trade policies, natural disasters, and the recent pandemic in particular. Such impacts include changes to pricing, cross-border transactions, tax regimes and government assistance programs.

As a result, anything that MNEs can do to improve the accuracy of their tax forecasts and ability to support them through transfer pricing helps to mitigate the worst effects of these unpredictable events. Due to the increasing frequency of such disruptions, it is now becoming as crucial to make a solid investment in tax and transfer pricing software as it is to run a strong ERP system.

Many organizations have found it beneficial to implement tax and transfer pricing software together, because their synergy enables MNEs to speed up their processes and boost accuracy by stepping away from manual and disconnected methods when forecasting, calculating, supporting, and reporting their tax positions. This speed and accuracy, in turn, are particularly useful assets when teams need to cope with the fallout from yet another unforeseen disruption.

These main benefits are supported by four key reasons to address any existing gaps in tax and transfer pricing software.

  1. Increased complexity: This first challenge is the ever-increasing complexity and unpredictability of the global economy, driven by shifting trade agreements and increasingly globalized trade.
  2. Greater scrutiny by tax authorities: Many authorities have switched to more sophisticated digital oversight models that enable them to better analyze organizations’ tax reporting. This increased oversight is further supported by the OECD’s Action Plan on Base Erosion and Profit Shifting, which is a global approach to tax policy that is currently under review for inclusion of even stricter measures. The greater scrutiny means that it is vital to have clear calculations in place both for tax reporting and provision, as well as intra-company transfer pricing.
  3. Data proliferation: The amount of data that multinational entities need to handle is growing in volume, velocity, and variety. This makes it difficult for tax and transfer pricing teams to interpret and take action if they lack the proper tools.
  4. Talent acquisition: MNEs risk missing out on attracting the best and brightest tax and transfer pricing professionals by failing to keep their software up to speed. Dynamic MNEs that have invested in modern tax and transfer pricing software can expect to attract the most talented professionals, who are looking for more from their day-to-day work than manual data manipulation and clerical tasks, like filling out spreadsheets.

Tax and transfer pricing software explained

Tax software automatically gathers data from multiple sources and aggregates them into the right format. This saves valuable time and resources compared to managing relevant data manually or in sprawling spreadsheets. It also provides the ability to automatically break down P&Ls by jurisdiction, entity, and even line of business when needed.

When using the right tax software, companies benefit from reducing the time needed to complete their tax provision and reporting. They can also independently access and present information in a format that enables not just tax teams, but also senior leaders, to understand the context behind their calculations. With superior reporting, tax teams can be more confident they have the right data at hand to provide accurate tax returns to the relevant authorities in a timely manner.

When it comes to transfer pricing, most MNEs use spreadsheets to manage their intra-company prices and shared resource allocations, such as when the corporate HR department bills its work to various subsidiaries for the support it provides them. However, using spreadsheets to manage transfer pricing leads to quickly outdated data held in static, siloed reports that are difficult to work with and to share. Because transfer pricing teams are restricted by such time-consuming, manual processes, they tend to wait until year-end to fully measure the impacts of their intra-company prices and make adjustments, which can often end up being rather large.

Dedicated software built from the ground up exists to proactively monitor and continuously manage transfer pricing policies organization-wide, which ensures that subsidiaries’ profitability targets are hit in support of the forecasted effective tax rates (ETRs). Using transfer pricing software, teams can deliver faster and more accurate transfer pricing data while using scenario planning to identify and address disparities between forecasted and actual tax liabilities.

Streamlining data flows between finance, tax, and transfer pricing teams

Given the clear benefits of using tax and transfer pricing software over using a mix of manual processes and spreadsheets, why do some MNEs still fail to invest in these improved systems? From our experience, one reason is the consistent prioritization of investment in consolidation and ERP software over either tax or transfer pricing applications.

This is an unfortunate tendency, because it can lead to a lack of integration between core ERP systems and tax and transfer pricing data, which then necessitates further manual intervention and manipulation. When tax or transfer pricing teams don’t get the data in the format they need, or at the level of granularity they require, they have to spend precious time looking for the right information.

In many cases, tax teams may not even have access to the financial data they need to make accurate forecasts, which means they resort to delivering multiple estimates to the transfer pricing teams. Calculations then must be revisited to make sure they are still accurate.

This should not be acceptable. In such unpredictable times, leadership teams need as much certainty as possible about their overall financial position, including short- and long-term forecasts that help them understand what that position could be in 12 months’ time.

How tax and transfer pricing software adds value

Ultimately, the best possible course of action when MNEs face unpredictability is to promote as much synergy among their teams as possible. When everyone works in tandem and shares the same goals, it’s much easier to capitalize on the efficiencies and support well-reasoned strategy.

The tools should follow suit. If MNEs can arrange themselves so that standardized data flow from core finance systems into the tax and transfer pricing departments, then everyone is able to work from a single version of the truth. For example, automatically consolidated P&Ls from finance systems enable transfer pricing teams to measure and manage profitability more easily across their organization, leading them to take action much sooner in order to hit the tax team’s forecasted rates.

And as tax teams get better at forecasting truly attainable and reasonable ETRs, transfer pricing teams are better positioned to work with shifting real-world dynamics to deliver on those ETRs. As a result, tax teams can move out of the backroom and take a seat at the top table, especially during turbulent times. Their work becomes viewed as more valuable to the organization as a whole.

Nevertheless, it can be difficult to secure investment in this new breed of software, especially as organizations are prioritizing liquidity and cash reserves in an unpredictable economy. Tax and transfer pricing professionals should not be discouraged, though. To read more about how to build an effective business case to secure internal approval on obtaining these important tools, the questions to ask prospective software partners, and more, read our whitepaper, Why Multinational Entities Need Tax and Transfer Pricing Software.