Cater to Arm’s Length Standards with Automated Intercompany Transfer Pricing Design

  • by Ashim A. Nanda, Managing Consultant, Global Business Services, IBM
  • October 19, 2010
Understand the pricing technique you can use in your SAP system to cater to IRS and EU arm’s length transfer pricing guidelines. Avoid double taxation on cross-country and jurisdiction transfers in an intercompany value chain. Follow configuration and master data checklists as well as two sample process flows that illustrate the technique.
Key Concept
Intercompany transfer pricing guidelines, generally referred to as the arm’s length principle or standard, are applicable when goods or services cross borders between related parties such as company codes in a company. The arm’s length principle of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. Thus, the value added in a jurisdiction should be taxable in that jurisdiction.

Multinational enterprises perform intercompany or interplant transfers to move materials between plants in the same or different countries or tax jurisdictions to manufacture a final product. For manufacturing organizations, factors such as resource availability, lower operational and labor costs, government policies, and scale economies play a decisive role in setting a production base across various geographies to be productive around the clock. In the case of service organizations (e.g., IT consulting), the justification is provided by factors such as 24/7 support using a global delivery model (i.e., executing a project with members distributed globally).

SAP offers a stock transport order (STO) process for intercompany transfers that operates as a pull method. The purchase order is raised in the receiving plant that requires the material. For this purchase order, an outbound delivery is created and goods are issued from the sending plant that has excess material. The goods remain in transit until they are received in the receiving plant.

Intercompany billing is generated in the sending company code. The SAP system offers the RD04 output type and IDoc communication to cater to the matching principle requirement to book the cost of sales (i.e., the vendor invoice in the receiving company code). The various legal guidelines for intercompany transfer pricing are based on the company’s value addition to the material being transferred. The SAP system offers condition types equipped with the capability to address these guidelines.

However, after the completion of the STO process, you might need to reverse the process for cross-site inventory leveling or to cater to a specific demand. The requirement could arise due to material damage in shipping and handling, the need for repair or rework in the received material, or merely because the sending plant now has a requirement surge for material not expected in forecasting models. Legal guidelines prevent arbitration via a circular movement of material, and accountants don’t want that company to pay the tax twice. I’ll discuss a pricing design using native SAP system capabilities to address the concerns of both tax administrators and accountants.

Ashim A. Nanda

Ashim A. Nanda is a managing consultant in SAP FI/CO working with IBM Global Business Services. He has more than eight years of experience with implementation, global rollout, and maintenance projects for clients in the pharmaceutical, telecommunication, automotive, and high-tech industries. Ashim holds an MBA in finance and systems from Xavier Institute of Management, India, and a degree in electrical engineering from University College of Engineering, India.

 

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