Transfer Pricing: the multi-dimensional transformation challenge
Updated: Jan 5, 2021
Operating Models in multiple dimensions
Designing an effective operating model for a multi-national enterprise (MNE) is an optimisation exercise that goes across a number of dimensions. In addition to the usual operational 'people, process, and system/technology' integration found in localised transformations, MNE's need to also optimise across other dimensions such as legal entities, location, logistics, talent, regulations, tax, and if a solution is to be sustainable then also geopolitics and regional socio-economics.
In recent years the OECD (Organisation for Economic Co-operation and Development) has facilitated new international agreements to limit the more egregious (although often legal) tax avoidance strategies that were being employed by MNE's. Such strategies relied on eliminating profits in higher tax jurisdictions with the use of chargebacks and royalties even where significant income had been earned by the company (something the OECD calls "Base Erosion"), and using intra-company transactions to declare profits in alternative, low or zero tax jurisdictions ("Profit Shifting"). The combination of Base Erosion and Profit Shifting (BEPS) took place by MNE's exploiting differences in tax levels between countries.
Transparency is now required
New standards now exist which among other things, require greater levels of transparency around intra-company transfer pricing and country-by-country reporting. These new standards have been implemented by around 130 countries. A substantial number of tax jurisdictions which existed for the sole purpose of facilitating BEPS along with other loopholes have been closed down through the use of tax treaties - in effect creating a new international tax system.
This new regulatory environment demands clear evidence of how transfer prices have been determined. Justification for pricing is based on; where functions are carried out, where income is being earned, and where key decisions are being made (along with the associated risk). This means that both a legitimate operating model design and a company’s compliance with that design must now be reported in multiple jurisdictions.
Managing Operating Model Design and Reporting
Unfortunately all that most companies and their consultants have available for designing, documenting and auditing MNE operating models are conventional office tools such as text documents, spreadsheets, slides, and drawing packages. However, these tools are a poor fit to the multi-dimensional nature and information density of large-scale transformation and MNE operating model optimisation exercises. As information is dispersed across numerous separate files created by different tools, integrated analysis and co-ordination of design by multiple actors becomes extremely difficult and time-consuming.
What is needed is a platform which joins up multiple dimensions, maintaining relationships which are inherent in operating models e.g. relationships between capability, process, KPI's, technology, organisation design, legal structures and localised implementations. In addition, a platform would ideally support the trajectory of delivery i.e. provide a joined-up view and support of the flow from strategic analysis though to operating model design, subsequent delivery, and compliance reporting.
ASSIST®: a platform for transformation and operating model design
ASSIST® is such a platform, the design of which has been informed by some 25 years of international transformation consulting for MNE's. It is both a framework and online cloud-hosted environment which enables consultants and their clients to collaborate on the journey from business strategy to operating model design, prioritisation, change management, and finally to the maintenance of a 'live' reference for compliance and audit.
If you would like to discuss and see how ASSIST® can be used to enable your MNE transformation and transfer pricing consulting delivery then please get in touch
ASSIST® is a framework and online environment for business transformation consulting which integrates strategic analysis, operating model design, and portfolio optimisation. You can read more about ASSIST® here