Transfer Pricing Pain….

Posted by Kelley LearcloseAuthor: Kelley Lear Name: Kelley Lear
Email: kelley.lear@redmoonsolutions.com
Site: http://blog.redmoonsolutions.com
About: Kelley is a member of the executive leadership team and leads our sales and marketing efforts at Red Moon Solutions. Kelley’s extensive experience in project management, product management, and consulting with Fortune 500 and Global 1000 clients is extremely important in this role.See Authors Posts (127) on Jun 29, 2011 | 0 comments

As promised, Traci Wheeler and I are continuing to share our experiences and sessions from the Association for Computers in Taxation Conference 2011 held in San Diego this year.  For this blog post, I think I will categorize this under our “Red Whine Wednesday” category of posts, due to the nature of the topic.  I was able to attend a session called Mastering Domestic Transfer Pricing and Legal Entity Accounting as presented by Joseph Ochoa and Daniel Falk.  Oh what a topic…if I was able to get you past the title to actually read this blog, I feel amazed and amused, as I know for most tax professionals, hearing about transfer pricing typically makes you want to head straight for “happy hour”.  For others, it seems to be fertilizer for the endless grey hairs that are continuing to sprout on our seemingly young craniums.   As the presenters posed…

“But, why should we care?  Why do we care about Transfer Pricing so much?.   Well, I would think that most of you already know the answer to that question.  Other than the operational and internal business focus, it is a very material and significant means for generating revenue for the IRS and now the states! Per IRC code section 482, the IRS can adjust tax payer income.  Yes, I think I felt another grey hair peek through.  Really, the basic premise is all about “comparability”.  The burden of proof is on the tax payer to support and document all transactions, and to provide for comparability.  Therefore, all transactions must be completed as though the two parties were unrelated.  The transactions need to be comparable to what you would expect if you were transacting or doing business with a third party provider for the same transaction.  The biggest issue is that if there is an adjustment, there can be up to 20-40% additional penalties if the tax payer is not able to provide proper supporting documentation.

In addition, cash hungry states are also applying the same methodology of 482 (per the IRS guidance), by requiring the same standards for documentation.  There of course, as in most state audit practices, also a 30 day turnaround for reproducing and providing this documentation.  The challenge that was touched on by the presenters, and the big challenge that I see in most tax departments are that unless you have a pretty solid process, well informed transfer pricing specialists, access to clean data and software to support this process, you may be working long hours, losing sleep and aging as fast as your new puppy, in your attempts to comply as well as to respond to aggressive transfer pricing audits.

Some of the challenges with current company data can be that age old problem of having most ERP systems (General Ledgers) implemented with limited tax department involvement.  Therefore, entity structures do not reflect legal entity structures, nor do they translate easily and report on data and transactions which take place amongst financial and management reporting structures to legal entity.  Doing this translation can be time consuming, manual and extremely error prone.  In addition, charts of accounts may not be tax sensitized effectively not only for regular compliance, but also for transactions of this nature. “Easy and accurate reporting” of the information needed to support transfer pricing transactions is almost an anomaly.  Ahhh…but, there is technology that can help.  Here are some of the solutions that might be a whisper of hope towards your dampened spirit:

1. Transfer pricing analysis, calculation and tracking solutions (rare but available)
2. Collaboration solutions
3. Business analysis or business intelligence solutions (such as Business Objects, Cognos, etc.)
4. Web based tax portals (workflow, collaboration and document management solutions around the transfer pricing process).

In fact, we are looking at other ways that our eTaxPortal and AuditRoom solutions can be even more effective at helping tax departments to manage this process and support the transactions your business needs to deal with globally.  We would love to hear your thoughts, or if you have been using any effective transfer pricing solutions out there, and how they are working for you!