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published on 13 October 2020
The Base Erosion and Profit Shifting (BEPS) Action Plan of the OECD ("OECD BEPS") focuses on transfer pricing as a tax structuring tool - and comprehensive documentation requirements have been issued to prevent tax structuring through transfer pricing. However, the new requirements offer an opportunity to redesign the process of creating transfer pricing documents and to combine it with the extensive possibilities of digitalisation. We/You should embrace this opportunity and smart up our/your processes for more efficiency and transparency.
When preparing a transfer pricing documentation, the digitalisation possibilities will largely depend on existing law and on the present organisation of the processes.
The creation of a documentation can be subdivided into the following 4 steps:
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The period prior to implementation of the OECD recommendation was characterized through strongly differing documentation requirements in the countries concerned. A uniform and central creation of documents could thus hardly be implemented. This was, among other things, a result of differing views regarding identical facts, e.g. in the classification of companies (strategic leader vs. routine companies). Considering a weak extent of digitalisation in the creation process, this gave rise to inconsistencies and a time-consuming coordination process.
The implementation of the OECD recommendations in national laws has led - and continues to lead (e.g. most recently in case of Argentina) - to an extensive harmonization of the documentation requirements. To be able to benefit from the changes, the following organisational requirements must be implemented:
Efficient management of the document preparation and coordination process is therefore necessary. We at Rödl & Partner use the term Global Approach to describe the combination of requirements and process management in summary.
This approach ensures maximal efficiency in production of documentation, which is ensured by three keys requirements:
Rödl & Partner has combined this in the TP Factory. It helps optimizing the creation of transfer pricing documentations with digital tools and thus generates added value. One of the tools is a collaboration and project management platform that is used to coordinate internal and external resources. The achieved progress and the outstanding process steps are visualized on a dashboard. This enables targeted coordination of the project. Employees are motivated to participate in the process through use of gamification components. The digital support has been made complete through partial automation of the actual documentation production. The example of the TP Factory shows how the process as a whole has been transformed and how the possibilities offered by digitalisation can be embraced at all levels.
The next step in the digitalisation of the documentation creation process is implementation of artificial intelligence (AI), which enables embracing extensive design possibilities for the production of the transfer pricing documentation. The condition prerequisite is that the organizational requirements have already been implemented in the process - as this has been clearly demonstrated in the Global Approach example. Only then the entire AI potential can be used. This includes, among other things, an almost complete extent of automation in the creation of documentation, including integration of the interfaces to the ERP system as well as a self-learning AI that detects and points out irregularities. The primary tasks of tax department personnel are thus shifting from classical routine tasks to processing of special cases, monitoring of the AI software and evaluation of the software-produced results.
The existing blockchain technology can be cited as an example to demonstrate what the transfer pricing documentation of the future could look like. The condition prerequisite is, however, introduction of adapting amendments to tax law or acceptance by tax authorities. That could yet become possible in near future. TheThai authorities are already in the process of testing blockchain technology in respect to VAT.
An advantage offered by the blockchain technology is the possibility to store data permanently, transparently and unchangeably. A possible application in transfer pricing can be, for example, automation and real-time verification of the transfer pricing transactions identified earlier through Smart Contracts. If pre-defined requirements match the actual conditions, the transaction is deemed valid and is executed automatically. Otherwise the transaction will be rejected. Documents in the classical meaning of this word would therefore be superfluous. Audits by tax authorities should then be limited to the system itself. The use of blockchains would thus lead to a completely different process for verification of the arm's length nature of prices.
The path to digitalisation has also emerged in the area of creating the transfer pricing documentation. The basis for digitalisation is a fundamental understanding of the entire process from data collection to submission of documents to tax authorities or a tax audit. Through use of adequate tools, sub-processes can already be organised more efficiently and partially automated. The next step achievable in medium term is integration of artificial intelligence in the process. In the long term, technologies - such as the blockchain already known today as well as previously unknown new technologies - offer an opportunity to redesign the evidence of the arm's length nature of the prices. However, this step will only be possible if tax authorities also embrace digitalisation.
Digitalisation is fundamentally changing our working world. No tax department can evade it. With the Global Approach and the TP Factory, Rödl & Partner already offers the possibility to fundamentally change the way transfer pricing documentation is created.
Heiko Preisser
Partner
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