Operational Transfer Pricing in Oracle Enterprise Performance Management (EPM)

Published May 13 2020
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The OTP Journey Begins - Operational Transfer Pricing in the Cloud.

The journey begins! Over the course of the next few blogs, we will take you on the journey that will show how Operational Transfer Pricing (OTP) can be implemented in the cloud, specifically in the Oracle EPM Cloud suite. As the primary calculation engine of our solution, Oracle Profitability and Cost Management Cloud Service (PCMCS) will be the focal point of many of our discussions, but we will often discuss other technologies in the Oracle Cloud EPM suite that will be leveraged.

But, for now, let's get our journey started with the basics of why OTP is necessary and how it should be implemented.

Introduction to Operational Transfer Pricing

Operational Transfer Pricing, the mechanism for pricing the internal trading of goods and services within or among subsidiaries of organizations, was once relegated to a realm of cost accountants in charge of “trading wooden nickels”.  It was considered to be an overall net zero-sum exercise for the organization.  Over time though, intercompany transactions became a substantial work activity and a source of strategic value for performance and incentive management, as well as significant financial value through optimization of tax strategies.  Substantial after-tax income could be influenced through the use of entities whose purpose was to allocate the profit margin on such an intra-enterprise business.  Thus, were born complex corporate and legal structures and a commensurately large support structure of accountants, tax specialists, and lawyers.

In more recent times, governments have been looking to protect revenue collection and minimize unproductive loopholes.  This has led to an increase in the scrutiny and enforcement of transfer pricing regulations by their major tax authorities.  Within the U.S., the IRS has retained additional economists and transfer pricing specialists to investigate and evaluate transactions, and levy penalties if statutes are not followed or even if proper documentation is not in place.  Additionally, documentation must be contemporaneous to the time that tax returns are filed, and if audited, a company would have thirty days to provide such documentation.

Complicating the matter is the fact that inter-company transactions are dynamic, multi-directional, multi-national, and multi-currency.  Multiple methodologies are needed to determine the pricing of intercompany business.  Yet, a structured framework to calculate, document, and maintain these pricing relationships has been elusive and has become a priority for many organizations.

Operational Transfer Pricing Challenges

Companies implementing Operational Transfer Pricing in their organizations often struggle with the same set of challenges due to the need to incorporate multiple data sources, the introduction of foreign exchange complexity, Transfer Pricing methodology complexity, lack of reporting capability, and overall lack of transparency and audibility.

Many of these challenges are born out of the choice of implementation technology and applications. All too often, organizations implement custom OTP solutions that involve Microsoft Excel, Access, custom SQL Databases, or even an attempt to implement the solution in General Ledger itself. Although these solutions work in the short-term, they almost always lack the key requirements to ensure longevity for the solution.

To combat these challenges, an organization needs to ensure that the OTP solution implementation is:

Implementing OTP In the Cloud

Regardless of the OTP technology and overall solution, all OTP solutions follow the same overall process. The before mention challenges present themselves at the various process steps if the right tool for the job is not utilized.

The below high-level solution architecture has been utilized by Alithya at numerous clients with great success.

Although we will explore each of the various process steps and applicable technologies in detail in the upcoming blogs a high-level overview of the technologies is below:

  • Enterprise Data Management Cloud Service (EDMCS) is utilized to ensure standardization of the metadata (dimensions) across the OTP solution and is also leveraged to introduce hierarchies and other properties that can simplify rule logic in Profitability and Cost Management Cloud Service (PCMCS)
  • Cloud Data Management (CDM) is utilized in the importing, exporting, and mapping of data in the solution. CDM provides the ability to connect directly to various source applications, can provide some workflow capabilities, and provide powerful data-related auditing capabilities.
  • Enterprise Planning and Budgeting Cloud Service (EPBCS) is utilized to provide the pre-calculated Plan data and, in addition, can be utilized to facilitate data entry across numerous departments and/or geographic locations and provide power Workflow and Task Flow capability to the OTP solution. EPBCS also has power analytics capabilities that can be leveraged if needed.
  • Profitability and Cost Management Cloud Service (PCMCS) is utilized as the primary calculation and reporting engine for the OTP solution. PCMCS provides clients with the ability to empower the business users responsible for the OTP process to control the calculation engine through Rule Sets and Rules directly rather than relying on IT for the implementation of changes. PCMCS also provides clients with traceable and auditable results and powerful what-if capabilities.

Conclusion

In its own right, OTP can often be challenging, complicated, and, at times, confusing. Implementing an OTP solution in an inappropriate or ill-suited technology adds to these challenges and 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.

The Oracle EPM suite, and the before mentioned technologies, in particular, can assist organizations in delivering their OTP results in a solution that is easily understood, easily maintained, traceable, and auditable.

In the upcoming blogs, we will deep dive into how to implement the various OTP methodologies in PCMCS, how to create valuable and meaningful OTP reports and how to execute the end to end process within the Oracle EPM infrastructure utilizing EDMCS, CDM and EPBCS.

I hope that you have enjoyed the first step in our journey to Operational Transfer Pricing in the Cloud and that I will see you again here soon.

For comments, questions, or suggestions for future topics, please reach out to us at infosolutions@alithya.com.  Visit our blog regularly for new posts about Cloud updates and other Oracle Cloud Services such as Planning and Budgeting, Financial Consolidation, Account Reconciliation, and Enterprise Data Management.  Follow Alithya on social media for the latest information about EPM, ERP, and Analytics solutions to meet your business needs.

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