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How to better integrate financial systems and transfer pricing

January 31, 2013

Emma Powell - ITR

More taxpayers want better integration between their financial accounting systems and transfer pricing to give them a greater degree of compliance certainty.

Taxpayers have said they need more efficient financial systems that are more comprehensive and robust in supporting the implementation of transfer pricing within their company.

“This is also a logical definition of the data used in the transfer pricing calculations can be specified and gathered consistently from sound sources, calculations performed and results fed back into the financial and tax systems in ways that remove the need for ad hoc data collection and entry – which if subjected to a detailed audit would be very hard to defend and validate,” said Stephen Labrum, managing director at Alvarez & Marshal Taxand.

When data is procured on an ad hoc basis it is risky, according to Labrum, because an auditor may have concerns about how the data is defined. As well as this, the source may not be audited and reconciled with the general ledger data and would therefore be harder to validate if a tax authority questions the integrity of the data. There is also greater risk that the source of the data is lost over time and not available in an enquiry.

It is more preferable if data used in transfer pricing is sourced through centralised financial systems, with a more rigorous process behind it.

“For example, if the transfer pricing policy is to price something on a cost-plus basis, it is much more robust if there is a procedures manual or documentation that is clear [about] which cost centres are included and why, or if allocations are involved, which allocation key is to be used and where the allocation key data are sourced,” said Labrum. “If this is then subject to potential review by internal or external audit, there will be much greater certainty that the numbers will be robust.”

Thomas Borstell, global head of transfer pricing at Ernst & Young, said that in his experience taxpayers sometimes present consolidated statistics rather than data from individual transactions.

Borstell said taxpayers need a more automated system of recording profits from individual transactions that is less step-by-step. However he recognised the difficulty in coordinating the collection of the data required to calculate transfer pricing from different departments within a company.

“[Transfer pricing] is a major issue because it touches on so many different points of a company such as HR and IT – it is an immense endeavour,” said Borstell.

Ian Brimicombe, head of group tax at AstraZeneca, also said ensuring efficient calculation of transfer prices involves cooperation between many departments within a company.

“It’s not a case for merging different finance functions to manage transfer pricing but it certainly requires collaboration and understanding from many departments within a company,” Brimicombe said.

“The information needed to calculate transfer prices is not generally relevant to business managers. Often the configurations for management information does not include information needed to establish and track transfer pricing.”

Beyond the financial systems used to calculate transfer prices, taxpayers require better integration between the tax department and finance functions themselves throughout the entire transfer pricing process. Increasingly taxpayers want more help with understanding the practical implications of transfer pricing structures.

Many tax departments will determine the appropriate transfer pricing policies, often with input from consultants, before handing over to the finance function to implement the policies, make the calculations and flow the resulting numbers into financial statements and general ledgers. These then feed back into the tax department to prepare the returns.

“The hand-offs between tax and finance have historically proved to cause problems when no one in the process has a comprehensive understanding of the technical tax and transfer pricing issues as well as a solid understanding of the accounting systems and whether the numbers actually used are consistent with what is needed,” said Labrum.

“What clients want is an integrated approach that will support them through both the design and implementation stages in a unified, consistent manner.”

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