International tax planning in the cloud - "real-time" coordination, determination and docu
1. Extensive requirements for international tax planning
The meeting of finance ministers in Japan in June 2019 has shown that the demands on companies in the context of international tax planning will continue to increase. The existing BEPS project (Base Erosion and Profit Shifting) of the OECD/G20 has already implemented new regulations in numerous jurisdictions, which have significantly changed the tax law requirements for the design and documentation of transfer prices between group companies. The coordination effort for determining and documenting tax transfer prices between international subsidiaries has thus become even more extensive.
In addition, digitisation has a stronger influence on transfer pricing management with regard to the determination of arm's length values, the documentation of arm's length transfer prices or the exchange of data with tax authorities.
From a tax law perspective, transfer prices are in the area of conflict between the avoidance of double taxation and tax optimisation as well as the reduction of documentation and tax audit costs (tax legal certainty).
These developments present transfer pricing departments with constantly increasing challenges. In order to meet the requirements, on the one hand, fast data availability is needed and, on the other hand, supporting IT tools are needed to cover the diverse requirements while ensuring international availability.
Another challenge in finding a suitable IT tool is that most tax experts are not IT experts and vice versa.1 This virtually excludes complex, internal company network architectures.
Cloud applications such as "Anaplan" could provide a solution to the challenges mentioned above. Cloud-based financial planning tools are user-based, freely configurable
1 Cf. Ditz et al. , S. 1044.
Planning tools that do not require a stand-alone network architecture and enable fast (international) coordination processes in real time.
Thus, cloud-based financial planning tools can be used to manage the balancing act between the tax and IT requirements with regard to transfer pricing.
For example, this technology enables a parent company based in Germany with its subsidiary in Japan to calculate and reconcile transfer prices in real time in a tax-optimised manner, while at the same time calculating taxes according to the respective national tax regulations. All that is required is internet access from the respective company.
2. Increasing importance of transfer prices to reduce international tax risks
Transfer prices are intra-group prices for transactions between related parties for tangible and intangible assets, services and intra-group financing. Tax transfer pricing is used to distribute profits between companies and jurisdictions.
This has enabled profits to be shifted to low-tax countries and the group tax burden to be optimised.
This approach, sometimes referred to as aggressive tax planning, has led to sustained internationalisation of the tax authorities and increased requirements for the calculation, documentation and verification of transfer prices. Within the scope of tax audits, significantly more extensive audit requirements were set. Transfer prices thus became a central cause of back taxes and the associated increasing tax risks.
3. Documentation: Success factor for reducing tax risks
In the field of transfer pricing, the requirements (calculation transparency, documentation, obligations to provide evidence of calculated bases, etc.) have increased significantly in recent years and are expected to continue to do so in the future.
One of the reasons for this is the BEPS project, which was initiated by the OECD/G20 to combat harmful tax competition and aggressive tax structures of internationally active companies.
As a result, the requirements for transfer pricing departments with accountability obligations have become much more extensive. Consideration must be given to how the allocation of profit amounts from the exploitation of intangible assets, the definition of the transactions affected by country-by-country reporting (CbCR) or the delimitation of transactions affected by tax deduction restrictions can be met.
Anaplan could make the processes considerably faster and simpler. For example, the subsidiary in Japan could document the transfer prices applied in Anaplan and present the tax deduction restrictions. The parent company can immediately see the effects on the subsidiary at the same time and use the current data for further group planning. At the same time, the group taxes can be calculated and the effects on the consolidated financial statements can be shown.
4. Digitisation of the tax authorities: Important option in the context of the tax audit
Due to the increasing declaration obligations and the international exchange of information, the availability of data on the taxpayer to the tax authorities has increased significantly in recent years. Tax administrations worldwide are pushing the expansion of data transmitted by third parties about the taxpayer, e.g. banks, suppliers, customers and other authorities. Since information about companies is available digitally and thus allows conclusions to be drawn about the substance of companies, the tax authorities are under great public pressure to use the data efficiently. 2
The tax authorities, and not least the tax investigation department, are meeting the increasing fiscal policy requirements by making greater use of IT-based audit and control instruments. Extensive digital requirements, in particular data requirements, are placed on companies with ever-shorter deadlines.
Therefore, cloud applications, especially in an international context, represent a sustainable support/relief for the companies’ vis-à-vis the financial authorities.
For example, in relation to the initial example, it would be conceivable that the Japanese tax authorities audit the subsidiary. Anaplan can be used to configure access rights to the audit deployment and to set up individual accesses for the Japanese tax authorities. For example, the Japanese tax authority could be granted processing rights during the audit, whereas the German tax authority is only granted read-only rights. The most sustainable and decisive advantage is that adjustments can be made simultaneously and thus all effects are visible for all parties involved. This enables the group of people involved to derive action strategies for themselves.
5. Meeting requirements in a future-proof manner
2 See Braun/Köppe , p. 394.
In conclusion, it can be stated, especially against the background of the BEPS developments, that transfer pricing will play an increasingly important role for all parties involved in the future, or will present them with a major challenge.
Cloud based financial planning instruments represent an efficient and sustainable solution for the group of people involved in order to cope with the increasing challenges. With Anaplan's available functions, both the people involved in the company and the international financial authorities can simultaneously follow the developments and effects and the extensive requirements can be covered.
As the developments in the BEPS project are dynamic in nature, the expected changes can be adjusted and coordinated, especially in the case of individually and quickly adaptable cloud-based planning instruments. Furthermore, new subsidiaries can be included or excluded at any time without having to adapt the IT infrastructure accordingly. New or modified double taxation agreements can be implemented promptly and additional documentation requirements can be added.
Braun, M., Köppe, J., : Digitization in the transfer pricing function - developments and opportu- nities, Der Betrieb No. 8 v. 22.02.2019, pp. 394-397.
Ditz, X. et al. 2019]: International Transfer Pricing - An Empirical Analysis in Times of BEPS and Increa- sing Digitization, Der Betrieb No. 19 v. 10.05.2019, pp. 1044-1049.
Dr. Christoph Hermsen, university lecturer for accounting and finance at the Fresenius University of Applied Sciences, research focus: Cloud-based process management, control of global companies and digital real estate management/M&A, studied economics at the University of Duisburg-Essen, followed by a doctorate at the University of St. Gallen, Switzerland. More than 25 years of leadership and management experience in manufacturing, international industrial companies, several years' stay abroad in the USA and extensive foreign assignments in North America, Asia and Eastern Europe.
Nico Heuing is a research assistant at the Fresenius University of Applied Sciences in the field of economics and media.