When a company hits product-market fit and has the financial possibilities to expand rapidly, it becomes increasingly challenging to manage transfer pricing. In this blog we will explain the 4 key reasons why this is the case for those scale-ups. By the end you’ll also know how a solid basis, considering these challenges, can limit the impact.
The four reasons:
- Limited resources
- Fast changing environment
- Operational framework
- Data landscape
Limited resources
Typically, tax processes need to evolve with the growth of the company. For example, dependent upon certain revenue thresholds, additional tax requirements come into play. In addition, when you set growth to a new jurisdiction or an acquisition takes place, this brings various additional work. In a stable environment, this may not be such an issue. This is because there is a solid basis to leverage from and there is room in the tax or finance team to take on the additional work. Typically, for a scale-up there are already many other challenges and no stable basis through which this can be burdensome.
As there are many one-offs in this growth phase, it is also a trade-off for these companies to determine to what extent you wish to invest in a full-blown tax team as you will likely require fewer resources when things have cooled down.
Fast changing environment
Transfer pricing is easiest to maintain if there is a stable environment, and you can improve related processes over time. For a scale-up, it can on the one hand be difficult to track all developments with all else that is on your plate as tax or finance manager, and often there is not yet a solid transfer pricing set-up that can be leveraged from.
Operational framework
At scale-ups, it may not yet be determined which role(s) entities have in the bigger picture and intercompany transactions may take place on a more incidental basis without being recognized. In addition, these roles and transactions may change more frequently.
Data landscape
If there is not yet a central ERP-system or if newly acquired companies still have to be integrated in that ERP-system, central and consistent data availability may be a challenge. Also, internal accounting manuals on how to book certain costs may still be under development, which can make the data to be used less trustworthy. In addition, there may be limitations (as for more established MNE’s) to how intercompany invoicing can take place (for example product price differentiation per jurisdiction may not be possible). If data were available on a more detailed level, this makes it also possible to set indicators on where developments (likely) take place based on data points.
How can a solid basis help?
If you take no solid action in the field of transfer pricing, you may end up in tax audits in various locations, non-compliance and potentially fines. In addition, (cash) tax costs are likely higher. Further, you may have burdensome calculations from an administrative point of view and limited business insight. In addition, financing the various entities appropriately is likely more difficult.
Understanding the business, its challenges, future growth vision and the regulatory landscape in the jurisdictions involved is key to obtaining a holistic view on how to best shape the transfer pricing policy and related processes. This policy should subsequently be simple to apply, compliant and supportive of the business. Further, dependent on the vision, it should already have some building blocks in place to integrate acquisitions or expand to new jurisdictions and have flexibility if there is a change in the business strategy. This will give you the desired control and set a solid basis for future growth and due diligence readiness if you are working towards an IPO or (new) investment round.