Transfer pricing meets technology

Businesses increasingly rely on their global synergies, affiliate networks and interconnected value chains to achieve optimal outcomes.

In an era where global interdependence and synergies are paramount, the significance of transfer pricing cannot be underestimated.

Businesses increasingly rely on their global synergies, affiliate networks and interconnected value chains to achieve optimal outcomes, and this is where transfer pricing plays a crucial role.

The subject has gained further relevance in Malta, particularly with the introduction of formal transfer pricing legislation effective from basis years commencing on or after January 1, 2024.

Typically, when a new legislation is introduced in any jurisdiction, the initial focus of both businesses and tax administrations tends to be primarily on compliance obligations. In the context of transfer pricing, this translates to ensuring that transactions adhere to the arm’s length principle in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines, 2022) along with maintaining the relevant transfer pricing documentation.

However, what is often overlooked is the broader relevance of transfer pricing in facilitating optimal business outcomes and enhancing value chains. It is essential to recognise that no tax or regulatory legislation is intended to create barriers for businesses; rather, these frameworks are designed to promote smooth and effective business operations although within the boundaries of the law.

If businesses concentrate on formulating policies that align with the arm’s length principle and ensure proper implementation and documentation, they can minimise the effort required to defend these policies in the event of litigation.

This is where a comprehensive understanding of the transfer pricing ecosystem becomes vital.

1. Policy formulation or the design stage: This initial stage involves the development of/designing policies for intra-group transactions. It is crucial that the arm’s length principle is adhered to from the outset, as recommended in the OECD Guidelines, 2022.

2. Documentation stage: This stage is often misconstrued as merely a compliance phase. Businesses frequently direct their efforts towards documentation only as compliance deadlines approach (for instance, in Malta, the deadline for maintaining transfer pricing documentation effectively coincides with the tax return filing date). However, postponing documentation till the compliance deadlines may result in the loss of historical information or necessitate additional effort to revisit past policies, rendering the process less efficient. Therefore, in an ideal world, transactions should be documented on a real-time basis. These can be later reviewed and refined.

3. Controversy or the defence stage: The final stage is one that businesses typically prefer to avoid as it can become increasingly tedious and time-consuming. To mitigate the likelihood of reaching this stage, businesses should prioritise their efforts on the first two stages. If there remains a potential risk, proactive measures such as seeking Advance Unilateral Rulings or Advance Pricing Arrangements (bilateral or multilateral) should be considered.

Interplay with technology and assurance

The fact that technology has made its way across every walk of life and business is not new and, therefore, even when it comes to transfer pricing, it should be utilised to its maximum potential (although after consultation with a transfer pricing expert):

• Capturing unidentified transactions;
• Ensuring that consistency in terms of policy setting is achieved across the group by having technology flag inconsistencies;
• Using automated benchmarking tools;
• Using technology to have standardised/automated contracts;
• Using technology to generate a first layout of transfer pricing documentation which could be later reviewed by an expert;
• Using technology for local translations in case there is such need (a requirement of multiple jurisdictions);
• Having technology generate multiple data points required for Country-by-Country Reporting (CbCR).

The possibilities are endless but the key takeaway is that the convergence of technology and transfer pricing can significantly reduce manual effort, thereby enhancing overall efficiency and allowing businesses to concentrate on their core activities.

No business wishes to allocate a disproportionate amount of time and resources to transfer pricing, and we believe that technology has the potential to revolutionise this area.

However, care should be taken that the above is always designed in consultation with/discussed with an expert on the subject to minimise risks given that a direct reliance on technology could generate undesired outcomes. Consequently, the role of transfer pricing professionals in the future will also evolve in response to these advancements.

Finally, these policies will eventually translate into numbers which need to be audited and, therefore, there is an inevitable and automatic interplay between transfer pricing and audit.

Join us on June 26 for an insightful event where we will explore all these areas, i.e., transfer pricing, audit and technology and more with real practical experiences.

This event is being held in collaboration with the Malta Chamber of Commerce. Find out more at www.ey.com/en_mt/events/transfer-pricing-meets-technology.

Mit Gaglani is transfer pricing leader, EY Malta.