ERP systems and operational transfer pricing: Relief is on the way Dbriefs Tax Operations series

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Partner, Deloitte Tax LLP Bob Norton, Specialist Leader,

1 ERP systems and operational transfer pricing: Relief is on the way Dbriefs Tax Operations series Stephen Losavio, Partner, Deloitte Tax LLP Bob Norton, Specialist Leader, Deloitte Tax LLP Nathan Andrews, Partner, Deloitte Tax LLP

2 Agenda Why the increase attention on transfer pricing? Key considerations in utilizing ERP environments Transfer pricing options using SAP Transfer pricing options using Oracle Questions Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 1

4 Operational transfer pricing What is it and why is it important? What Is It? The systems and processes for transacting, controlling, and ensuring that all intercompany transactions and related accounting adhere to the company s transfer pricing policies Why is it important? 1. Increasing transfer pricing visibility from OECD/G20 BEPS and media coverage 2. New Country-by- Country reporting requirement 3. Changing business models to conform to BEPS The TP policies set by the business are ineffective without successful execution Operational Transfer Pricing All outputs are dependent on how well the operational transfer pricing works Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 3

5 Operational transfer pricing challenges facing business Three examples 1 2 Profitability analysis across supply chain: Intercompany transfer pricing profit targets across the global supply chain (by entity, function, product) must be achieved by year-end to avoid negative effective tax rate and earnings impact Automation of Cost Allocations: Data capture, aggregation, categorization, mark-up, allocation, and invoicing of centralized costs that benefit affiliated entities across the supply chain 3 Data accessibility: To comply with Country by Country ( CBC ) and other transfer pricing reporting requirements and ensure consistent views of data across financial statements, statutory accounts, master file, local file, CBC report, and tax returns. Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 4

6 The OTP process: Capture, allocate, and report OTP Process Foundational requirements of OTP Intercompany services Intercompany sales of goods Fully burdened P&Ls Capture (budget and actual) Support function staff costs Global service center costs CGS and direct costs Operating margin P&Ls Aggregate By category to be marked up By category to be marked up By function, by product By legal entity Markup Per transfer pricing policy Per transfer pricing policy Per transfer pricing policy N/A Allocate To legal entities by appropriate driver (headcount, # of pcs, revenue) To legal entities by appropriate driver (headcount, # of pcs, revenue) To functions and products by appropriate driver By function, by product including indirect costs Reporting and analytics Summary of totals, markups, and allocations by legal entity, by function, by product Summary of totals, markups, and allocations by legal entity, by function, by product Fully burdened function and product P&Ls Fully burdened P&Ls by legal entity, function, and product Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 5

7 Polling question #1 How are you calculating, monitoring and adjusting your intercompany transfer prices? Manually via spreadsheets Combination of spreadsheets and Access databases Pricing conditions set up within the ERP and TP results monitored via spreadsheets ERP pricing conditions and reporting via integrated consolidation system (e.g. HFM, BPC, etc.) Third-party bolt-on operational transfer pricing system Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 6

9 Business model alignment The dichotomy of financial system infrastructure How management needs to view the world How Brazil views your company How France views your company How China views your company Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 8

The importance of legal entity balancing in an ERP Legal Entity financial requirements must be addressed in the development of critical enterprise structures and the Chart of Accounts design Segment

Registrars, Regulators... Legal Entities Registered Companies, Funds, Partnerships Inc. LLC. Ltd. SA. GmBH. Etc.

10 The importance of legal entity balancing in an ERP Legal Entity financial requirements must be addressed in the development of critical enterprise structures and the Chart of Accounts design Segment 1 Segment 2 Segment 3 Segment 4 Segment 5 Segment 6 Company Code Cost Center Natural Account Intercompany Other Future Regulates Legal Authorities Countries, States, Local, Agencies, Taxation, Registrars, Regulators... Legal Entities Registered Companies, Funds, Partnerships Inc. LLC. Ltd. SA. GmBH. Etc. exist in the outside world Managed & analyzed by Management Entities Divisions, LOBS, Plants, Cost Centers, Whatever = Decision Making Tags Complies A Legal Entity is defined as a unique master data structure that drives transactional and statutory reporting ability Entity used to represent a legal company A GRE/Legal entity organization classification applies when your enterprise operates in a country Represents a legal employer that is responsible for employing people in a particular country, producing earning statements (W2s, T4s, P60) Legal entity administers transaction level rules in compliance with national laws Legal entity architecture provides the ability to model an enterprise's legal organization structure and define rules and attributes specific to legal entities A legal entity is associated to a single ledger Fiscal and tax reporting are done at the legal entity level Bank accounts are tied to a legal entity Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 9

11 Identify the stakeholders involved Tax needs to be proactive in aligning with all the functions of the organization Financial reporting Treasury Tax Statutory reporting Operations & supply chain Operational performance reporting Management reporting Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 10

12 Polling question #2 What do you view as the greatest challenge in managing a company s transfer pricing policy? ERP and financial systems not configured for transfer pricing reporting Access to data in the format and level of detail needed for transfer pricing Inaccurate forecasting of intercompany transactions Cost allocations Computing profitability by function across the global supply chain Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 11

13 Tax requirements need to be transactional The general ledger should be a culmination of tax requirements, not the starting point Business activities Business transactions Financial and Tax reporting ERP transactions Management and Operations Cash Management Planning Supply Chain Logistics Purchase Orders Sales Orders Internal Requisitions Invoices Credit and Debit Memos SEC, Management and Legal Entity Financial Reports Transactional Based Tax Reports Transfer Pricing Reports Customs and Duties Reports Country Specific Statutory and Tax Reporting Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 12

14 Creating a tax-aligned value chain model Integrating tax and operations Value Chain Supply Chain Redesign (plan, source, make, deliver) Network Optimization Sales and Operations Planning Demand Planning/ Advanced Planning Systems Product Lifecycle Management Sourcing and Procurement Lean (Enterprise Operational Excellence) Distribution and Manufacturing Strategy Global or Regional Logistics/Freight Optimization Supply Chain Event Management Supply Chain Execution Systems Plant Rationalization Tax-Aligned Value Chain Model Tax Tax Structuring Intellectual Property and Intangible Development & Ownership Merger Integration Customs Indirect and Local Taxes Transfer Pricing Tax/Treasury Financial Accounting for Tax Credits and Incentives Inventory Strategies Property Tax With-holding Tax Data Structure Process Organization IT Systems Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 13

15 Polling question #3 Which of the following catalysts are driving your company s interest in operational transfer pricing? Finance Transformation New ERP implementation/upgrade Implementation of transfer pricing software Business model optimization Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 14

Transfer pricing is a multi-faceted problem Country by Country Reporting An

Profitability Management Monitoring of actual vs targeted profit by legal entity,

Multi-tiered allocations of shared cost pools to specific legal entities.

transactions that differ than physical transactions Supply Chain Cloud Copyright

17 Transfer pricing is a multi-faceted problem Country by Country Reporting An upcoming Finance & Tax disclosure requirement by country (BEPS) TRCS + EPRCS Profitability Management Monitoring of actual vs targeted profit by legal entity, function or product PBCS (Planning & Budgeting Cloud) Intercompany Allocations Multi-tiered allocations of shared cost pools to specific legal entities. PCMCS Tax Value Chain Enterprise intercompany supply chains results in tax transactions that differ than physical transactions Supply Chain Cloud Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 16

18 Transfer pricing solution using Oracle Cloud solutions TP Dashboards and Country by Country Reporting EPRCS Analytics & Dashboards TRCS CbyC Templates 2 TP Calculation and Analysis Oracle PCMCS, PBCS 1 FDMEE (ETL) Data Quality TP Foundation Layer Bi Directional Integrations TP Hierarchy Management Attributes Management (Tax codes, FX codes) 3 GL System Project Acc. ERP System Payables Receivables 1. Source Data (TB, tax info) 2. TP calculation results 3. TP Adjustment JE/Invoices Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 17

19 Polling question #4 How is your company handling the Country by Country Reporting requirements? Manually via spreadsheets Using a third-party tool Embedded with our ERP and consolidation systems Using a third-party provision application Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 18

21 Components of SAP technology supporting OTP Each of the five scenarios will leverage different software technology to support the key components and associated reporting. Unified SAP S/4HANA Single ERP Multi-ERP Central Finance Major Components Solution Unified SAP S/4HANA stack leveraging: SAP S/4HANA Finance BPC Optimized SAP S/4HANA Sales, Supply Chain Single ERP leveraging: CO-PA BPC (Standard or Embedded) FI Material Master Multi-ERPs loaded through Central Finance SAP S/4HANA Finance (Central Finance) BPC Optimized Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 20

Components of SAP technology supporting OTP (cont.) Each of the five scenarios will leverage different software technology to support the key components needed and the associated reporting.

22 Components of SAP technology supporting OTP (cont.) Each of the five scenarios will leverage different software technology to support the key components needed and the associated reporting. Mixed ERPs on SAP HANA Mixed ERPs No SAP HANA Solution Major Components Mixed ERPs on SAP HANA leveraging: BPC on HANA or native HANA FS-PER for HANA allocations Mixed ERPs No SAP HANA leveraging: BPC SAP BusinessObjects PCM Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 21

23 SAP S/4HANA unified solution In a unified SAP S/4HANA solution, leverage the components of SAP S/4HANA for collection and allocations, and SAP Fiori and SAP BusinessObjects for reporting and analytics. Reporting and Analytics SAP Fiori SAP BusinessObjects SAP Fiori and SAP BusinessObjects will support the CbC reporting requirements as well as OTP analytics reporting Capture and Allocate Central Finance SAP S/4HANA Finance SAP Business Planning and Consolidation (BPC) SAP Accounting SAP Cash Management SAP S/4HANA SAP S/4HANA Sales Sales and Distribution SAP S/4HANA Supply Chain Materials Management Production Planning Capture actual and budget intercompany transactions and perform allocations to a fully burdened P&L in SAP S/4HANA Finance Leverage SAP S/4HANA Sales and Supply Chain for pricing and generating intercompany invoices Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 22

OTP reporting and analytics in SAP S/4HANA CbC reporting of OTP data is a

Analytics of that data can help your organization identify opportunities to reduce

SAP BusinessObjects, using data in S/4, will generate the detailed CbC reports

24 OTP reporting and analytics in SAP S/4HANA CbC reporting of OTP data is a requirement of the BEPS regulations. Analytics of that data can help your organization identify opportunities to reduce corporate tax rates. SAP BusinessObjects, using data in S/4, will generate the detailed CbC reports Analytics and dashboards can be visualized with Fiori or SAP BusinessObjects Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 23

26 Join us August 17 at 2 p.m. ET as our Tax Operations series presents: Tax compliance and provision software: Annual tax technology update Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 25

27 Eligible viewers may now download CPE certificates. Click the CPE icon in the dock at the bottom of your screen. CPE Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 26

Contact information Stephen Losavio Partner Deloitte Tax LLP slosavio@deloitte.

com Nathan Andrews Partner Deloitte Tax LLP nandrews@deloitte.

28 Contact information Stephen Losavio Partner Deloitte Tax LLP Bob Norton Tax Specialist Leader Deloitte Tax LLP Nathan Andrews Partner Deloitte Tax LLP Copyright 2017 Deloitte Development LLC. All rights reserved. ERP systems and operational transfer pricing: Relief is on the way 27

29 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2017 Deloitte Development LLC. All rights reserved.

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