Within your global supply chain, transfer pricing, customs, and indirect tax are undeniably connected. Each step in the global supply chain is intertwined—from setting the transfer price and customs import valuation to goods receipt and invoicing. As a result, changes in one link affect the next, which illustrates the value created when these functions work together.
Within most multinational companies, transfer pricing, customs, and indirect tax are managed independently. There typically is little overlap in their day-to-day processes, but these three functions have much in common.
Every tax executive wants to build a cutting-edge tax department that supports the global growth of their company, ensures compliance in every country in which it operates, and reduces expenses. But with overwhelming economic, regulatory, and operational factors all at play, is this possible? It is, if you take a holistic look at your tax processes, particularly a special opportunity that lies at the intersection of transfer pricing, customs, and indirect tax.
Common Data, Different Uses
From an information collection standpoint, transfer pricing, customs, and indirect tax are similar. The data each function gathers is virtually the same; it’s just put to use differently. This is where a siloed tax operation is most detrimental. The negative effects of working independently are immense—including redundant work, lack of standardization, countless error-prone spreadsheets, and the need to support multiple systems.
To build that cutting-edge tax operation we all strive for, a common strategy is needed to collect and consume data more rapidly and use it to streamline operations and build analysis and insight that will take tax functions to the next level.
Getting Cross-Border Pricing Right
In addition to operational cohesiveness and data sharing, a cutting-edge tax department also must understand the challenges it faces in optimizing cross-border pricing across the supply chain.
Intercompany prices for sales and purchases are a primary instrument to allocate profits among business entities across the globe to compensate them for their respective functions performed, assets employed, and risks borne. Accordingly, a measurable and accurate allocation of profits is essential for a company to achieve its overall income tax objectives.
However, customs duties are assessed on each import transaction as a percentage of the intercompany price regardless of entity profitability. Duty rates vary globally, with percentages ranging from zero percent (free) to more than thirty percent based on the product, country of origin, and import country.
Tax authorities prefer lower import prices, which result in increased taxable profits for the buyer. In turn, this results in greater income tax collections. Customs authorities prefer higher import prices, which result in a greater duty burden for the buyer. This results in greater duty collections. Accordingly, tax and customs have separate and distinct rules that are unaligned and challenging from a compliance perspective.
Additionally, according to the Base Erosion and Profit Shifting (BEPS) guidelines from the Organisation for Economic Co-operation and Development (OECD), corporate profits at the aggregate entity level must be within a range that is appropriate for the functions and risks of the entity compared to its peer companies. Transactional prices must satisfy the WTO agreement’s “circumstances of sale” tests.
Significant Opportunities
The opportunity for multinational companies lies in the ability to set transactional prices at the time of invoicing that:
- Comply with transfer pricing and customs transactional value arm’s-length requirements
- Result in tax-compliant, entity-level profitability in aggregate by source
- Ensure the company does not pay more duties than legally required
- Coordinate the transfer pricing, customs, and indirect tax processes throughout the year
- Most importantly, this must be done on a multijurisdictional basis to amplify the value it brings to the company.
The Enabler
Comprehensive tax technology enables you to take advantage of the opportunity that lies at the intersection of transfer pricing, customs, and indirect tax. Because the systems and processes of all three functions must be in sync, a comprehensive technology solution is typically the best option. From aligning and tracking valuation to indirect tax determination and full landed cost analysis, you can streamline your workflow, avoid re-entering data, reduce errors, and improve compliance.
Even in the face of challenges related to increased globalization and regulation, you can create that cutting-edge tax department that provides strategic insights to the organization. This opportunity opens up when you look at your tax functions and processes holistically—with comprehensive tax technology by your side.
Joseph Harpaz is head of the ONESOURCE tax technology business at Thomson Reuters.
