But isn’t OTP the tax team’s problem, not the finance team’s?
Like many tax processes, such as BEPS Pillar Two and tax provisioning, Operational Transfer Pricing (OTP) is an intersectional process that relies heavily on finance for execution.
While tax teams define pricing rules, including markup percentages and target margins, it’s finance that is responsible for putting those rules into practice. Finance must manage:
- ERP inputs: Ensuring the correct transfer prices are applied
- Monthly close: Logging and adjusting intercompany revenue
- Consolidation: Performing intercompany eliminations to balance the books
- Planning: Applying transfer prices to budgets and forecasts and reviewing actual results
- Errors: Handling misstatements, late adjustments, discrepancies in intercompany entries, and audit issues
According to Deloitte, nearly 70% of Heads of Tax at over 250 multinational companies believe there is room for improvement in their group’s OTP processes. We believe this signals a clear need for deeper finance involvement.
Where does OTP risk come from? And why is the risk growing?
As with most financial processes, OTP risks originate at the data level. When OTP is performed manually, cell by cell in spreadsheets, errors are inevitable.
As Deloitte notes, “inefficient or inaccurate transfer pricing policy can lead to real cash outflows due to large year-end adjustments, tax fines, and penalties. Similarly, the loss of precious time performing repetitive, manual tasks pulls important resources away from higher value-add activities.”
What exactly are the risks? Here are some of the most critical:
Input errors
Spreadsheets are vulnerable to data entry mistakes, version control issues, and are difficult to validate, which makes them less audit-friendly. Even a small typo can have impacts that ripple into financial statements, the P&L, forecasts, plans, and strategic decisions.
Distorted P&L and margins
If transfer prices aren’t charged at arm’s length, tax authorities can challenge them, exposing the company to adjustments and penalties that can reach up to 40% in extreme cases. If not caught early, incorrect transfer pricing can distort the P&L and both geographic and product-level margins.
Delayed close
OTP requires adjustments throughout the year, not just at year-end. Misapplied adjustments create reconciliation challenges that significantly impact consolidation and intercompany processes, especially when manually adjusted. One finance professional at a Fortune 500 company reported that a single intercompany reconciliation could take more than four hours a day.
Unplanned adjustments
When OTP is unmonitored or errors go unchecked, large year-end true-up adjustments become necessary. These are extremely time consuming for already overburdened finance teams and can lead to changes in tax returns, unbudgeted foreign exchange impacts, skewed forecasts, and inaccurate profit figures.
Forecasting and budgeting issues
While the tax team provides guidance on transfer prices, FP&A forecasts results based on the applied prices. Misaligned or incorrect transfer prices skew budgets, forecasts, and financial signals leadership relies on. And as we all know, the root of poor decision-making comes from poor bad data.
Profit leakage
Incorrect pricing results in distorted margins, penalties, and forecasting issues that impact the bottom line. When actual transfer payments don’t reflect policy, the result can be false profitability at the business unit level, adjustments that erase expected profits, as well as penalties, interest, or double taxation.
Audit issues
Inconsistent transfer pricing creates red flags for both tax and financial auditors. On the tax side, mismatches between policy and actual transactions can result in noncompliance, triggering large retroactive adjustments and heightened audit scrutiny.
On the finance side, material weaknesses and financial misstatements may lead to adjustments or even restatements of financial statements. With global tax regulations increasing in complexity, compliance challenges will only intensify, further elevating audit risk.
Take the reins on OTP with a Finance-first approach
The best OPT is Finance-first OTP. OTP has significant consequences for financial imperatives, from profitability, budgeting, and planning to consolidation and the close. It’s our belief that OTP processes should leverage the same financial intelligence capabilities that power other critical corporate performance management tasks, such as ESG planning and lease accounting.
When designing an OTP transformation, implement a process that:
- Connects OTP to planning and actuals: Linking OTP to actuals ensures the P&L reflects what really happened, preventing artificial profit inflation or leakage, unnecessary adjustments, and unreliable analysis. With OTP integrated into planning, finance can confidently create transfer cost plans and allocate profits based on actuals, not estimates, ensuring plans are accurate and profits are true.
- Embeds OTP in the close and consolidation process: Embedding OTP into consolidation processes ensures that both operational and consolidated financial statements apply consistent pricing logic. Automation within consolidation reduces manual adjustments and reconciliations. Close automation can handle true-ups and allocations aligned with existing close cycles, using controlled transfer pricing data.
- Aligns tax and finance: Tax teams set the transfer pricing rules, and finance must clearly understand and implement these in daily transactions, reporting, and the P&L. A unified software platform with workflows supporting both tax policy setting and finance execution fosters alignment, ensuring the books reflect economic reality, maintain compliance, and show true profitability.
- Provides visibility into margins and transfer pricing: Real-time visibility into transfer pricing helps finance monitor intercompany transactions closely, ensuring prices remain at arm’s length and errors are detected and corrected early. Ideally, this visibility should extend down to the product, plant, and legal entity levels to cover all finance’s requirements.
- Is audit ready: OECD and local tax compliance are just the start of tax scrutiny. Maintaining a verifiable record of how transfer prices were calculated, applied, and reconciled — from policy setting through journal entries — is critical to demonstrating compliance with established policies. An automated audit trail captures every detail, making it easier for finance teams to support audits and for auditors to obtain clarity quickly.
Start your OTP transformation with CCH Tagetik
CCH Tagetik Operational Transfer Pricing transforms what was once a fragmented, manual process into a real-time, embedded capability. Combining automation and financial intelligence empowers tax and finance teams to manage transfer pricing with agility, precision, and compliance. By leveraging the same data, platform, and workflows already trusted, OTP turns transfer pricing from a compliance burden into a strategic business advantage.
Learn more about the new CCH Tagetik Operational Transfer Pricing.
