7 steps to implementing an operational transfer pricing
TRANSCRIPT
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7 Steps to Implementing an Operational Transfer Pricing Solution
Operational Transfer Pricing, the mechanism for pricing the internal trading of goods and services within subsidiaries of organizations, was once considered to be an overall net zero-sum exercise. However, over time, operational transfer pricing (OTP), or intercompany transactions, became a substantial work activity and a source of strategic value for performance and incentive management, and presents significant financial value through tax strategy optimization.
Substantial after-tax income can be influenced with entities whose purpose is to allocate the profit margin on an intra-enterprise business. OTP is now considered an important exercise, and complex corporate and legal structures and a commensurately large support structure of accountants, tax specialists, and lawyers have been born out of it.
MANUFACTURING INDUSTRY FINANCIAL SERVICES INDUSTRY
HEADQUARTERS (Cost Center)
Selling Division 1 (Profit Center 1)
Selling Division 2 (Profit Center 2)
Independent Customer 1
Independent Customer 2
Selling Division (Profit Center)
Independent Customer
Production Division (Cost Center)
Transfer Price SettingProducts/Services
Internal Sales
Shared Services Delivered
External SalesExternal SalesExternal Sales
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Lack of integration of OTP data with other financial information
Intensive manual maintenance of transfer pricing process and solution
Opportunity costs due to inefficient transfer pricing settings
Time-consuming and inflexible reporting to comply with audit, tax, and reporting requirements
Inability to control the sequential nature of the transfer pricing process
Delayed access of financial information to internal and external financial consumers
Cumbersome intercompany and foreign exchange validation
Inability to proactively assess risk and impact of potential changes in tax legislation and OTP pricing methodologies
Insufficient standardization leading to inefficiency in the OTP process
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Because OTP is heavily monitored by auditors and tax authorities, it’s important to stay on top of the intricacies involved. Implementing an OTP solution with inappropriate or ill-suited technology can result in organizations either feeling overwhelmed by their OTP solution and/or not being able to deliver specific mandatory requirements, resulting in potentially devastating consequences.
Here are some common challenges organizations face when dealing with OTP:
Many of these challenges are born out of the choice of implementation technology and applications. Often, organizations implement custom OTP solutions that involve Microsoft Excel, Access, custom SQL Databases, or even an attempt to implement the solution in the General Ledger itself. Although these solutions may work in the short-term, they lack the key requirements to ensure longevity for the solution.
The Oracle EPM suite can assist organizations in delivering their OTP results in a solution that is easily understood, easily maintained, traceable, and auditable.
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oneSTEP
PCMCS, OTP Methodologies and the Start of Building our Solution
What is PCMCS?
PCMCS is a robust calculation and reporting cloud solution that enables business users to gain control over the management of their calculation process, perform what-if analysis, and create stunning reports whilst providing unparalleled visibility and auditability. PCMCS can be utilized for a variety of business use cases such as Shared Services Costing, Expense Allocations, Operational Profitability, Intercompany Billing, and, of course, Operational Transfer Pricing.
PCMCS fits within the Oracle Enterprise Performance Management (EPM) suite of products and leverages the Essbase Database as the calculation engine for the technology. Because of this, PCMCS can be quickly and easily adopted in organizations that are already invested in the Oracle EPM suite in addition to having exceptional integration capabilities to the rest of the EPM suite.
Read more about PCMCS
Management Owners andInvestors Regulators
Enterprise Performance Management Suite
PerformanceReporting
NarrativeReporting
Mngmt. Reporting
Tax Reporting
Financial Close & Consolidation (FCCS) Accounts
Records
Profitability and Cost Management
Enterprise Budgeting and Planning
Projects
Capital
Workforce
Strategic Modeling
WorkflowMappings and
Drill BackHierarchies and
Attributes Enterprise Data Management
Cloud Data Management
Shared Integration Platform
Operational Systems
Customer Management
Resource Management
General Ledger
Sub Ledgers
Financial Systems
Oracle Profitability and Cost Management Cloud Service (PCMCS) is utilized as our core calculation engine and reporting tool when it comes to OTP in the cloud.
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twoSTEP
Currency
Entity (Sender Entity)
EPMFlex1 (Department)
Account
Catalog/Service
ResourceClass
EPMFlex2 (Activity)
EPMFlex3 (Recipient Entity)
Years
Period
Scenario
Version
LegalEntity
CatalogOwner
CatalogType
CatalogCategory
Rule
Balance
DataSource
View
AllocationPool
DriverType
AllocationType
MethodType
Dimensionality and Rules for the OTP Solution
Point of View Dimensions
In any PCMCS application development cycle, our first task is to define and build our dimension outline within the PCMCS tool.
There are:
• System Dimensions• Point of View Dimensions• Business Financial Dimensions• Business Analytical Dimensions• Attribute Dimensions
The image at right illustrates the common dimensions deployed within our PCMCS OTP solution.
The dimension approach defined above ensures that both the calculation and reporting expectations can be met— ensuring scalability and flexibility for future model enhancements.
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System Dimensions
Business Analytical Dimensions
Entity Attribute Dimensions
Catalog Attribute Dimensions
Business Financial Dimensions
AllocationPool Attribute Dimensions
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threeSTEP
Defining Rules and SetsRules Set and Rules in PCMCS enable us to move and create data at various intersections to accommodate our calculation and reporting expectations. However, an element that is often overlooked is traceability; OTP calculations must be traceable—we need to be able to easily explain how we calculated our charges and the way we structured the flow of data through our dimensionality. The diagram below illustrates the flow of data through the dimensionality in our solution; from importing data from the General Ledger(s) and statistical data sources, through allocations/calculations and finally to the output to reports and downstream General Ledgers(s).
Data Source PCMCS
Entity (Sender Entity) Account
Entity (Sender Entity) Currency
EPMFlex1 (Sender Entity)
Unspecified ResourceClass
Unspecified AllocationPool
Unspecified EPMFlex2 Activity
Unspecified CatalogService
Unspecified EPMFlex3
RecipientActivity
Source Financial Data
Statistical Data Sources
Statistical Account
Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency ResourceClass AllocationPool
EPMFlex2 Activity CatalogService
EPMFlex3 RecepientActivity
Source Statistical Data
Statistical Account
Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency ResourceClass AllocationPool
EPMFlex2 Activity CatalogService
EPMFlex3 RecepientActivity
Data Prep
Account Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency
Unspecified ResourceClass
Unspecified AllocationPool
Unspecified EPMFlex2 Activity
Unspecified CatalogService
Unspecified EPMFlex3
RecipientActivityCurrency Calc
Account Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency ResourceClass AllocationPool
Unspecified EPMFlex2 Activity
Unspecified CatalogService
Unspecified EPMFlex3
RecipientActivity
Resource AllocationPool
Account Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency ResourceClass AllocationPool
EPMFlex2 Activity
Unspecified CatalogService
Unspecified EPMFlex3
RecipientActivityActivity
Account Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency ResourceClass AllocationPool
EPMFlex2 Activity
CatalogServiceUnspecified
EPMFlex3 RecipientActivity
Catalog
Account Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency ResourceClass AllocationPool
EPMFlex2 Activity
CatalogService EPMFlex3 RecepientActivity
RecipientExternal Billing & Incurred Costs
Account Entity (Sender Entity)
EPMFlex1 (Sender Entity) Currency ResourceClass AllocationPool
EPMFlex2 Activity
CatalogService EPMFlex3 RecepientActivity
Output Prep
Account Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency ResourceClass AllocationPool
EPMFlex2 Activity
CatalogService EPMFlex3 RecepientActivity
ReportingInvoicing & Reporting
Account Entity (Sender Entity)
EPMFlex1 (Sender Entity)
Reporting Currency ResourceClass AllocationPool
EPMFlex2 Activity
CatalogService EPMFlex3 RecepientActivity
JournalGeneral
Ledger(s)
Source Data
Calcs
Output
Import Data Data is populated on these dimensions during import.
Allocated for Calculated Data
Dimensions are impacted by Allocations/ Calculations during this step Output Data Data contained in these dimensions are
utilized in the population of the output
LEGEND
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fourSTEP
Some of the key reports that we have included in our OTP
solution are:
OTP ReportingAs Reporting is the most visible aspect of the OTP solution, we must understand the interest of our target audience to ensure we are addressing their needs accurately. The table below lists the common report recipients and the type of reports they are expecting.
Report Recipient Recipient Description Recipient Requirements
OTP Analyst
These are individuals who are responsible for the running of the OTP solution. Their primary concern is to ensure the solution is running as expected and producing results accurately.
System validation reports for analyzing any performance or related.
Input and output validation reports.
Analyst and Managers (Sender
or Recipient)
Business analysts and their managers in the Sender and/or Receiver Entities (Business Units) who are primarily responsible for ensuring the accuracy of the charges, or revenues, attributable to their Entity by the OTP solution.
Reports for analysis charges and revenues attributed to their Entity (Business Unit).
Invoices and supporting details associated with their Entity (Business Unit).
Data Exports to facilitate the composition of their own Reporting.
Auditors and Regulators
Internal and external regulators are required to audit the OTP solution output and identify any inconsistencies or anomalies.
Standardized Reporting with consistent formatting to allow for trend and variance analysis.
Output Validation Reports containing detailed information.
Solution and Program documentation.
Senior Management
Individuals who take overall responsibility for specific Business Units within the organization, or the entire organization, that are affected by the OTP solution output.
Standardized Reporting of charges and revenues associated with their Division/Business Unit.
Dispute Resolution reporting.
Tax and external reporting that the OTP process contributes to.
• Invoices• Billing detail reports• Monthly billing reports• Service reports • Comparative Pre and Post OTP Tax Reports
• Expense to Revenue and Revenue to Expense Reports• Journals for downstream GL applications
Ensuring we know our audience, what the reporting options are, and what are some of the key reports we need to produce is a critical element in ensuring the success of our implementations.
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fourSTEP
Leveraging Oracle EPM Planning
Although PCMCS is an amazing tool, introducing Oracle EPM Planning into our solution provides us with the following high-level benefits:
• Separation of user communities responsible for entering and reviewing data (Oracle EPM Planning) and executing calculations (PCMCS).
• A mechanism for controlled and secure distributed data input through Oracle EPM Planning Webforms and Workflow.
• A mechanism for the review and approval of invoice amounts prior to the journal preparation process.
• A mechanism for dispute resolution should invoice amounts be challenged.
• Advanced reporting capabilities with little or no downtime due to efficient calculations in the solution.
For OTP, Oracle EPM Planning is dedicated to the data entry and reporting steps in the chart at left (highlighted in green) and PCMCS is responsible for maintaining and executing the OTP calculations (highlighted in blue). Learn more.
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Source External Data
F/X Rates Drivers
Rail BalanceTransfer Prices
Routing Info
Review and Adjust Assumptions
Manual AssumptionsBenchmarksExternal Data Adjustments
Review Existing Input Data
Execute Calculations and AllocationsProduce Routing
CalculationsService Allocations with Markup and
Residual
Analyze Results and Variance
Ad Hoc AnalysisWhat If Scenarios
Publish Results and Invoice
Published ReportsExtract to ERPs
We deploy EPM Planning applications within our OTP solutions to work around difficult, and sometimes key, OTP requirements.
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sixSTEP
Learn more about each of these components
Source Systems Integration Engine Calculation and Allocation Engine Reporting and
BI Engine
Other source data
Data Warehouse
ERP
Clo
ud
Data M
anag
em
en
t (CD
M)
Oracle Cloud EPM
Workflow/Task Flows
Data Entry
Roles and Security
Shared Service Cost Allocations
OTP Calculations
Mark-Up Calculations
Journal Preparation
EPM Planning
EPM Profitability
Smart View Reporting
Financial reporting
Cloud analytics
Metadata Management - EDMCS
Integrating the OTP SolutionThere are three major backend integration components to our OTP solution that may not be instantly visible to the end-user, but if they are not configured correctly, you would notice right away.
They include:
Metadata Management - the management of dimensions, hierarchies, and members in our solution.
Data Integration - the development, deployment, and management of data-centric activities.
Automation - stringing together activities. It can cover the automating of activities throughout our OTP process from the deployment of Metadata, import and exporting of data, execution of calculations, and even distributed reporting.
Here you can see how each of these three components fits into the overall OTP solution:
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sevenSTEP
Does your company have a systematic, repeatable process for managing OTP?
Is your company able to incorporate OTP into the financial planning and forecasting processes to gain a holistic view of the company’s consolidated and segmented financial statements?
Does your company have a comprehensive approach to reporting that provides auditors and tax authorities with a transparent view of the impact of OTP to both sender and receiver entities?
Is your company able to efficiently monitor the impact of change to intercompany agreements or changes in tax code?
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Transforming and Increasing the Effectiveness of your Operational Transfer Pricing Process
Ask yourself
these questions:
Our OTP solution reduces risk related to data input and calculated output errors, increases flexibility, and drives efficiencies. Ultimately, these benefits lead to reduced operating costs to manage and maintain the system and a proactive risk monitoring model. But like any other system, you need to consistently transform and increase the effectiveness of your OTP solution.
You have heard the term, “garbage in, garbage out.” Similar to other financial models, quality data in OTP is integral to producing results that gain trust and reduce the risk of audit deficiencies. Given the intercompany agreements that exist,
OTP models often incorporate several data types that come from various source systems, such as ERPs and transactional subledgers, as well as manual data sources, such as time studies.
Modern OTP solutions include governance models that utilize controls over the data to assist in validating the reasonableness of data input and automate the data being sourced to the solution. These controls help to validate the integrity of the model and ensure that manual data touchpoints are eliminated—reducing the risk for input errors.Read more.
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help our clients reap the benefits
of their technology investments.
Our technical and functional
knowledge of OTP provides our
clients with a solution that will
drive an automated process
that provides insight, follows
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scalable for future change.
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