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Operational Transfer Pricing
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Operational Transfer Pricing – Spotlight on automation
Laurence Kiddle CEO at ARKK
Once largely hidden in the shadows, Operational transfer pricing is coming under the spotlight. A recent Deloitte tax technology survey highlighted it as the area of tax most likely to receive investment in the next 3-5 years. However, compared to other areas of tax where change has been mandated such as MTD for VAT, the adoption of automation has been very slow, and many processes creek along on Excel or other end user created solutions. This is beginning to change, and I was reminded of this recently from a somewhat unlikely source.
One of the delights of music streaming is how the algorithm throws in songs I've not heard for many, many years and discovering how my relationship with those songs has changed. Nevertheless, it was still a surprise to find Chris Rea's late 80s hit The Road to Hell on repeat in my internal jukebox. And while Spotify was the initial prompt, it was amplified by discussions I've recently had in my tax and regulation-focused day job.
I was talking about operational transfer pricing with a large technology company. Consciously or not (probably not), the tone of the conversation echoed the lyrics of The Road to Hell. The observation being, "This isn't a just a process failure… this is the spreadsheet from hell"; which felt uncannily close to the gravel-voiced singer's "this ain't no technological breakdown/ Oh no, this is the road to hell".
Apparently, the idea for the song came to Chris Rea while driving down the M4 – perhaps even more mundane than the world of operationalizing transfer pricing adjustments. But it held an uncanny resonance. The spreadsheet in question is a beast. Consisting of around 30 tabs with a spider's web of links between them, it takes several minutes to open and to an outside observer is utterly impenetrable. Yet it holds the key to making adjustments of tens of millions of pounds every year.
This is not even the most difficult process I've seen. Others involve various data wrangling process to extract data, off-line calculation engines, and several days spent reviewing and fixing the outputs. The contrast with their VAT compliance process, where data is automatically extracted from their ERP and uploaded into ARKK's VAT automation software, where the machine learning algorithms identify anomalies, run trend analyses and complete the return, is stark.
There are varied reasons for this. A lot of VAT automation was mandate driven, triggered by making tax digital (MTD) for VAT, using full automation or bridging software – there has been no similar mandate for OTP processes. Operational transfer pricing often slips between tax and finance – the OTP processes might be owned by tax, but the pain of execution often rests within finance. Additionally, HMRC has not put the same attention to reviewing the practical application of TP policy as it has to the definition of the policy itself.
Finally, traditional solutions for automating operational transfer pricing have come with challenges. The best-known solutions include heavily engineered accounting software which come with implementation time and total costs measured in quarters and halves (years and millions respectively). For many users, it's been considered easier until now to just suck up the pain of the spreadsheet from hell.
Meanwhile, the internal jukebox plays on. "All the roads jam up with credit / And there's nothing you can do / It's all just bits of paper / Flying away from you". That also resonates. Many of these conversations reflect a sense of powerlessness, where the operational transfer pricing process is known to be broken but there appear to be few viable alternatives – and the pain of switching software suppliers seems even higher than that created by the monthly process. As growing businesses become more complex so does the spreadsheet, which has the paradoxical effect of making it even harder to use and even more difficult to move away from.
This is now changing. Increasing recognition of the risks inherent in manual transfer pricing practices, and the huge amount of manual effort they suck up, are driving businesses to look for automation alternatives. For example, one organization I spoke with was prompted into action when they discovered a £40mn true-up – enough to cause a significant shift in their forecast ETR for the following year.
And, critically, there are new off-the-shelf solutions that are far more flexible – and affordable. The approach for VAT reporting outlined above, for example, works just as well for automating operational transfer pricing adjustments. Simply automating the data capture process removes a significant amount of risk as a rules-based engine can remove manual intervention from the allocation process.
At the same time, machine learning capability is very good at identifying anomalies. The flexibility of cloud deployments moves away from the all-or-nothing approach to automation. It is clearly a better solution than jamming more and more into an inadequate spreadsheet model – and for most organisations, preferable to implementing a highly specialized heavy lifting solution.
The internal jukebox whirls around again. Google tells me that Chris Rea's follow-up to The Road to Hell was Tell me there's a heaven. That's too convenient an analogy to pass up. There is a much better way to manage operational transfer pricing – ARKK's for:sight platform. Come talk to us.
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