Setting the scene
On 19 December 2023, the Luxembourg Parliament voted to approve bill n°8276 revamping the investment tax credits available under article 152bis of the Luxembourg Income Tax Law (LITL). The most significant change to the rules, in addition to the increase of applicable rates, consists of an inclusion of certain operating expenses connected with eligible transformation projects on which a 18% tax credit may apply (more in the dedicated newsletter).
This law is a perfect catalyst for Multinational Enterprises (MNEs) to review and revamp their transformation. Beyond the immediate investment tax credit benefit, a myriad of benefits would ensue:
- Positioning Luxembourg group entities as Global Hubs for Data & Digital Transformation and European coordinators for Green Transition;
- Rendering your organisation nimble enough to successfully wade through the multiple tax and regulatory compliance requirements in today's highly fragmented yet global economy – think here OECD Pillar II, DORA, Public CbCR, Sustainability reporting etc.;
- Agreeing on a common framework and lingo across organisation to facilitate exchanges and policy handovers among the numerous internal stakeholders (accounting, finance, tax, legal, business, governance...).
In this paper we highlight solutions where Transformation and Operational Transfer Pricing (OTP) drive multinational corporations to achieve the versatility and agility they need.
Advancements in technology, the rise of digital economies, evolving international tax laws, OECD's Pillar II rules, the EU's BEFIT proposal and the likes have already significantly altered the Transfer Pricing (TP) landscape and will continue to do so at an increasingly fast pace in the next few years. These developments demand a dynamic and proactive approach to TP. Companies must now continuously monitor and adjust their TP strategies and decision-making processes to align with real-time operational data, ensuring that their practices remain compliant and efficient.
Operational TP, therefore, goes beyond traditional compliance. It is a tool for strategic decision-making, risk management, and value creation within multinational enterprises. By embedding TP into daily operations, businesses can achieve a more cohesive and transparent approach to managing their global tax obligations and safeguard their reputation while optimising their overall tax position.
Creating and managing a robust data ecosystem linking finance data on the business level and linking it to tax and TP data on the entity level should be high on the agenda of the companies in the upcoming years.
Increased complexity and compliance requirements. Demand for transformation and data management.
New initiatives on TP and tax-related reporting obligations are currently on the rise at a supranational level, as well as on a stand-alone countries level. Reporting transforms from traditionally "upon request" matter to "mandatory" data submission subject to strict deadlines and penalties for non-compliance. This global demand for increased tax transparency involving new mandatory reporting obligations makes it no longer possible to manage the vast amounts of non-structured and non-integrated data manually.
Traditional methods of managing collection of TP-related data are getting tedious, time-consuming and can no longer guarantee seamless and error-free results. Companies are required to disclose information on multi-layered bases, starting from the consolidated country level (e.g. Country-by-Country Reporting, Pillar II, Digital Operational Resilience Act (DORA)), drilling down to the transactional data at the entity level.
A new era of emerging global tax ecosystems is on the rise submitting both taxpayers and tax administrations to a lot of compliance and timing pressure. Tax function’s focus is no longer on simply optimising a tax output as it has to reckon with maintaining reputation and trust in the marketplace and tax authorities. Building this trust requires highly reliable real-time data processing and minimum manual intervention in this process. Technology and data integration are therefore more important than ever.
TP automation - What do companies seek?
At the end of a financial year, companies often make last-minute changes (e.g., true-ups) to their tax reports. Those are becoming more complex to estimate and are getting more attention from tax authorities worldwide. They want to know why these changes are needed and if the company's TP policies are properly set up and checked regularly. The year-end adjustments often have a significant impact on value-added tax (e.g. estimation of value of services provided), customs duties (e.g. import/export price of goods), deductibility of interest expense (e.g. on working capital financing for a subsidiary), etc.
The data required for the tax and TP reporting is getting ever more closely connected to the live financial accounting data of the companies. The data points, which are used to comply with the new reporting requirements, are intersecting a lot and are sourced from the same internal systems (ERP[1], CRM[2], HCM[3], warehouse/supply chain/product lifecycle/asset management, accounting system, etc.). However, turning this blended data into something useful for quick analyses and updates isn't straightforward. Legacy ERP systems or even lack of those, email confirmations and approval processes, internal reporting in static old-fashioned excel files make the whole process less efficient, less reliable and significantly increase TP compliance costs.
To address those new challenges, advanced planning, and analytical technologies, often called FP&A[4], XP&A[5] or EPM[6] can be the best fit solution. By creating a golden source of data, data analytics platforms ensure a reliable technological hub, able to collect, digest, re-inject and analyse massive amounts of transaction. They have the advantage of being scalable, agile in their connections to existing IT ecosystem (feeding and being fed by all the relevant existing software’s and databases) and, above all, evolutive with stakeholders’ needs and usage.
In the current moving tax environment, it is key, not only to ensure the quality of historical data, but also to have the capabilities to build scenarios projections and forecasting simulations for taking the right strategic decision. With new paradigms, the capacity to store, and even more to manage and interpret the data in regards with business ambitions, regulatory requirements, and legal frameworks, will make the difference between leaders and laggers.
Indeed, organisations equipped to anticipate impacts, risks and also detect potential opportunities will be able to have a proactive and under-control tax strategy. Cross-entities transactions and tax items are expected to get even more complex because of increased volume of trades and the exponential growth of underlying documentation to collect to abide by the multiple compliance requirements. Organisations should rely on both flexible and robust XP&A solution and external professional support in their transformation journey both (i) to accelerate and (ii) ensure alignment with Market best practices. The move towards an agile TP management implies both technological (XP&A) expertise and operating model (re)design experience.
[1] Enterprise Resource Planning
[2] Customer Relationship Management
[3] Human Capital Management
[4] Financial Planning & Analytics
[5] eXtended Planning & Analytics
[6] Enterprise Performance Management
Crafting robust TP policies that align with a business strategy.
More than ever, it is now critical for companies to smoothly incorporate TP policies and governance into their existing corporate financial systems. It is a modern-day requirement, that TP practices are consistently applied across all business operations with related parties, enhancing overall compliance and efficiency. Considering recent tax reporting trends and anticipated developments, companies should view the direct integration of TP policies as an ongoing process, not a quick fix. There is a clear need for continuous adaptation and improvement in response to evolving regulatory environments and changing business conditions.
Financial and operational data must be always up to date. This drives the right management decisions, realignment of strategies and helps to identify short-term gains and long-term priorities. In addition, live monitoring of business processes is essential for real-time compliance oversight. Quick identification and addressing compliance issues on the spot, ensuring that TP policies are effectively and timely implemented and consistently followed gives a competitive edge for companies on quick decision-making and reducing compliance costs. To allow for these synergies, companies must reach a new level of technological maturity by stepping on a path of financial transformation.
Internal financial transformation allows for creating a unified data model for operational management to streamline TP and other tax related compliance. Integrating TP processes into financial and/or ERP systems is a strategic move that can significantly enhance data accuracy and operational efficiency. This integration allows for a more cohesive approach to managing TP within the broader context of corporate financial and tax management. This reduces manual intervention, minimises errors and speeds up the entire TP management and reporting process, aligning it with contemporary digital business practices. Moreover, by creating a single, unified data model that serves both TP requirements and operational management, companies can gain valuable business insights, which otherwise would have been overlooked.
OTP Best-In-Class Future state vision
Click to enlarge the illustration
Like it is crucial for executive management to rely on automated and digital solutions for operating their data preparation and TP computation, it is also needed to have them ready to support strategic decisions. A performant XP&A / Data platform to make TP analysis is a key component to support leaders in maximising the value creation at each level of an organisation by implementing or enhancing centres of expertise amongst their organisation, highlighting most profitable products or services, and translating their ambitions in complete financial projections.
Data is a material that should be used for continuously adapting and optimising the operating model of international groups while taking into consideration all transformation areas (client, operational, finance transformation, etc.), and all transformation dimensions (value proposition, process, governance and organisation, tools & data, skills & experience, ESG transition).
Functionality and implementation options: Solution diversity based on individual requirements
Closing statement
The current tax, regulatory and IT environments are conducive to an in-depth review of financial data systems to allow for nimble bolt-on solutions such as the implementation of TP policies and their documentation. Delaying such review will only be costlier in the future as this step is not just about meeting today's requirements but also about setting up for future success in an ever-changing and fast-moving financial world.
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