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Embracing Tranfer Pricing Accounting and Compliance

With digitization and globalization of economy, companies operate from multiple jurisdiction and often have the cross-border trade with group entities. Globalization has hauled the structure of the business transaction such as Intercompany sales, Stock transfer, royalty benefits, group services etc. It provides both enormous opportunities and significant compliances challenges. It enables the company to look for the opportunities to increase the business by taking advantages of country specific benefits such as lower cost wages, availability of natural resources, subsidies, skilled talents etc. On the other hand, the risk with respect to compliances as such benefit comes at the cost of laws and regulations which require special accounting and reporting of such intercompany transactions under each geography. Additionally, intercompany transaction face rigorous scrutiny from the Auditor/Regulator. Once such regulation is Transfer Pricing.

Transfer pricing in simple terms refer to the price charged for sale of good/services between the group entities. It provides an opportunity to companies to structure a business transaction in a way profit shift to lower tax rate countries. But it increases the risk of costly tax penalties and disputes with Tax authorities. To regulate such activities, the Transfer Pricing law requires the transactions between the associated entities (Related Entities) should be priced at Arm's Length (Fair Price). To comply with this requirement, the companies adopt the different method like Advance pricing agreements / Cost sharing etc. Based on these methods, the Revenue/Cost will be shared between the group entities.

Though companies implemented and upgraded the financial system by investing in various ERP solution, but the overall focus of these system was to manage the day to day affairs with respect to accounting, reconciliation and regular reporting. However, when it comes to implementation of transfer pricing process, these systems found to be less effective in automating the processing of Transfer pricing accounting, reporting and compliances. Companies often faces challenges at various level, some of them are

  1. Lack of visibility, real time access and ability to drill down into the group entities transaction while determining the Transfer Pricing strategy.
  2. The resource-intensive processes in data collection through heterogeneous data factories within in the group entities,
  3. Lack of documentation supporting the calculation method, Pricing criteria etc. leading to Audit and tax compliances issue.

Furthermore, the business users must brainstorm on some of the decisive points in designing the overall Transfer pricing strategy of the company such as

  1. Determine the Transfer pricing structure considering the Tax benefits, Logistics benefits based on operational profitability, sourcing of Material, customs etc.
  2. Determine the best Transfer pricing method depending on the nature of business, profit margin and Tax treaties between countries.
  3. Determine the frequency of adjustment to the Transfer pricing policy.
  4. Co-ordination between Finance and Tax team and identifying clearly the roles and responsibilities on report, data collection, exception management etc.


This blog exhibits how Infosys Accounting and Reconciliation (IARC) platform as a service can be utilized for complying with transfer pricing law applicable to organization alongside the regular accounting. It provides the flexibility to select the optimal transfer pricing method with an ability to update based on the evolving business scenario like new acquisition, Merger, change in tax regulations etc.

The following flow depicts the Transfer Pricing process in IARC

Transfer pricing Updated.PNG


















The Infosys Accounting and Reconciliation (IARC) as a service work as a standalone utility and can integrate with any transaction processing system. It provides a flexible, intuitive and scalable solution with a tailor-made approach for collection, processing and reporting transfer pricing information. It enables user to define and maintain the agreement/Contract configuration at the central level such as Legal Entity, Partner, Inter-company matrix etc. The accounting framework generate the Transfer pricing accounting using the centralized configuration/user defined rules based on the Local GAAP by utilizing predefined accounting templates. The solution allow user to specify transaction attributes, charge type/transaction component etc. which need to be considered while calculating the amount and allocating revenue/cost between the group entities. The tool provides the flexibility to develop customized reports based on the country reporting requirement. comprehensive dashboards and reporting give real-time visibility into progress, exceptions, and risk points.

Features

  1. Modular solution with user defined criteria/rule-based approach.
  2. Efficient documentation strengthening the integrity and the value of calculation method used.
  3. Automate the entire process of Transfer pricing calculation and reporting right from eligibility determination, calculation, accounting of revenue reclass amount, tax compliances reports and documentation.
  4. Generate the Transfer pricing accounting at the transaction level instead of summarized Journal at the Month end or Year end.
  5. Pass real time adjustment in sub-ledger system with transaction reference to keep the Audit trail.
  6. Comprehensive dashboard-based report with advance analytical features.

 Business Benefits

  1. Simplifies compliance with Complex transfer pricing accounting and reporting.
  2. Flexibility to adapt business and regulation changes swiftly by adding or updating configuration and rules with complete audit trail.
  3. Ability to use transaction attributes like transaction direction, Product, Channel, Brand etc. while calculating the revenue reclassification amount.
  4. Use Flat/Percentage/Hybrid based method for reallocation of revenue between the group entities.
  5. Efficient automation improves the data efficiency and eliminate the dependency on error prone manual process.
  6. Create real time adjustment without having to wait until the end of the close cycle or reporting period.

Conclusion

The transfer pricing is not new, but it's at exciting and evolving stage. The process, practices are unique to organization and varies from entity to entity. In such a scenario, the success of the implementation depends on the solutions which are tailor made and are quicker, flexible and efficient to update and deploy. The Infosys Accounting and reconciliation (IARC) as service can enhance users experience with its cutting-edge functionality which crisscross the multiple business functions including sub-ledger accounting, Full bank reconciliation, Financial and Management reporting and Transfer pricing calculation and compliances to name a few.

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