The impact of digital disruption on transfer pricing

January 26, 2023

Digital disruption and a global economy have caused a profound shift in the way companies conduct global business operations. Businesses are facing challenges in terms of transfer pricing, particularly when it comes to international transactions. David Whitmer, national transfer pricing lead at CBIZ MHM and Chair of the Kreston Global Transfer Pricing Group and Ganesh Ramaswamy, Partner at Kreston Rangamani and Associates LLP, Global Tax Group Regional Director, Asia Pacific were invited to comment on these developments by the International Accounting Bulletin. Read the full article here, or the summary below.

Digital disruption and Big Data

The digital revolution is having a profound effect on how business enterprises function, replacing physical systems with those in cyberspace. This has completely changed the way companies interact with their customers, introducing ways to analyse their behaviour and preferences online. These insights are being used to innovate value chains and develop more appealing customer propositions and revenue streams.

Cloud computing, AI, blockchain, the Internet of Things, VAR and automations all offer organizations the potential to optimize operations, increase customer engagement, and drive cost savings with Big Data, providing valuable details regarding what is succeeding and failing in the marketplace.

Businesses have been using Artificial Intelligence as a means of improving their digital marketing strategies. By using AI for forecasting demands, customer profiling and enhancing customer experience, companies are able to generate higher brand recall rates.

Businesses that embrace digital transformation will take advantage of automation, cost efficiency and advanced safety measures.

Digital disruption and transfer pricing

The repercussions of digital transformation are far-reaching and have implications for transfer pricing. Technologies such as artificial intelligence, robotics and blockchain have changed how businesses interact and transact with one another, which has had a considerable effect on the approach to transfer pricing.

Tax regulators around the world have expressed worry about systems that fail to capture profits made through digitizing businesses. Such income is often earned in locations where firms don’t have a physical presence, leaving them free to avoid taxes. The Organization for Economic Cooperation and Development (OECD) has responded with Pillar 1, which will make multinationals pay taxes where they carry on business and bring in revenue. Various nations across Europe, Asia, Latin America and Africa have already adopted Digital Service Tax (DST), taxing the top-line of money made. It’s anticipated that implementing Pillar 1 will lead many countries to discontinue such levies gradually.

Companies from various sectors that are undergoing digital transformation should consider a few essential transfer pricing queries. Questions such as:

  • Who holds the rights to any valuable intangibles created through digitalisation?
  • What impact has digital transformation had on the group’s value chain?
  • The transfer pricing positions are already set up by the multinational group – are they still defensible and supported by the necessary paperwork?
  • Do you employ remote workers on a large scale? Consider how these individuals make their contribution in terms of services and sales across multiple tax jurisdictions.
  • Do you have a centralised warehouse system that allows you to serve sales from one location to multiple countries? You need to review any applicable intercompany agreements, making sure they keep up with the changing landscape.
  • How will you keep up with technology as it is developed within your organisation, as well as its dissemination within the commercial and supply chain networks?

Multinational companies are making use of big data analytics and AI to better their marketing efforts, as well as address and enhance quality control matters and streamline their manufacturing operations. They should record data on how these advancements helped the multinational entity’s revenues. To limit transfer pricing issues in the digital era, they need to know where they acquired this data and how it was integrated into technical progress.

In conclusion, it is clear that there is a significant enough impact on tax obligations for global and digital businesses to understand their position and what will affect transfer pricing across their business.

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