Recent changes to transfer pricing (TP) regulations and compliance requirements have caused many companies to rethink the way they manage the transfer pricing function. One of the most important questions they face is whether to outsource or in-source the transfer pricing role—but the answer isn’t always so simple. In this article, we cover the different approaches to transfer pricing management, as well as the advantages and disadvantages for each.
3 Ways To Approach Transfer Pricing Management
There are three ways to handle transfer pricing-related work within an organization:
- Outsourcing is a model in which a company’s entire transfer pricing function is managed by an outside advisor, with no dedicated, in-house practitioner.
- In-sourcing is a model in which a company hires a qualified transfer pricing professional—or a team of them—to manage transfer pricing in-house.
- Co-sourcing is a combination of outsourcing and in-sourcing, which occurs when a transfer pricing advisor partners with a company’s in-house transfer pricing team to effectively manage the transfer pricing function.
Should you outsource or in-source transfer pricing?
There are advantages and disadvantages to both outsourcing and in-sourcing—as well as many reasons why co-sourcing is often the ideal approach. (Tweet this!) We’ll break it down for you.
Outsourcing: The Pros & Cons
In the past, most organizations outsourced the transfer pricing function, relying on advisors to manage documentation and ensure compliance with industry guidelines. An outside advisor who specializes in transfer pricing has likely seen every possible issue and scenario that can come up for taxpayers. They also bring to the table a network of people they can call on for assistance when certain issues arise, and usually have access to databases and other resources that an in-house team likely does not. Because transfer pricing is a multifunctional discipline that presents accounting, economic, analytical, and legal issues, access to experts and specialized resources can be especially useful.
Of course there are issues with outsourcing transfer pricing entirely. While a solely outsourced model may work best for small companies without enough TP issues to engage a full-time, senior professional, larger, more complex organizations almost always require a dedicated person in-house who has firsthand knowledge of the business. Why? Because an advisor offers invaluable expertise from a transfer pricing perspective, but lacks the in-depth understanding of the company needed to manage all aspects of the transfer pricing function.
Transfer pricing complexities are hard to manage alone. Talk to us about how our expert advisors can help you optimize company policies and minimize risk.
In-sourcing: The Pros & Cons
One of the biggest benefits to in-sourcing is it guarantees that a qualified professional is fully dedicated to managing the daily aspects of transfer pricing. Because the individual is employed with the company full-time, they have a much stronger understanding of the business’ transfer pricing challenges. This approach is likely to generate cost savings in the long run.
That said, there are also disadvantages to in-sourcing the TP function. While it guarantees the person will be fully immersed in the company’s transfer pricing activities, it’s often very challenging to find the right person with the right skills to manage the discipline. There’s also a strong possibility that no one individual may be able to properly handle all the different issues that come up, as they’re more likely have a narrow perspective in comparison to an experienced team of advisors.
Co-sourcing: The Best Of Both Worlds
The short answer to the outsourcing vs. in-sourcing question is this: Neither is ideal.
For most companies, co-sourcing is the best approach to managing the transfer pricing function. It allows the company to gain an experienced, outsider’s perspective, network, and resources, and employ an in-house professional to manage the day-to-day aspects of the transfer pricing function. In this model, the director of transfer pricing (or director of international tax) decides the allocation of work—what is ideally managed in-house vs. what will best be handled with the assistance of outside advisors.
Another advantage to co-sourcing is that the transfer pricing workload is variable, and tends to be seasonal and/or cyclical. The transfer pricing function can be extraordinarily busy during certain seasons - such as year-end, tax return filing season, and the Company’s annual planning cycle. Likewise, it can be rather slow during other periods; having full-time employees dedicated to transfer pricing is often inefficient. Co-sourcing allows companies to rely on advisors on an as-needed basis to help balance out the internal team’s workload when unexpected projects and problems come up.
Co-sourcing is also absolutely necessary in the event of audit disputes. If a company’s transfer pricing activities are being disputed by tax authorities, having a reputable advisor’s support lends credence to their position. The best advisors have good relationships with tax authorities and can help clients face difficult issues and substantiate their claims. Nothing the transfer pricing team does is more important that properly managing audit issues with the regulators.
Let’s Collaborate On Your Transfer Pricing Policies
At Valentiam, we specialize in assisting corporate tax departments with transfer pricing issues. Our deep knowledge of the field (all of our transfer pricing partners are recognized as being among the “World’s Leading Transfer Pricing Advisers”) means we don’t deliver standard solutions—we work closely with you to design transfer pricing strategies that optimize your organization’s tax efficiency. If you’d like to explore a co-sourcing arrangement that offers the best of both worlds—your company knowledge plus our industry expertise—let’s talk.