Transfer Pricing Algorithm

Introduction

Context

Welcome to the OpenSource Transfer Pricing Algorithm with Tax Impact Computation wiki page! This platform serves as a comprehensive resource for understanding and implementing a pioneering open-source algorithm specifically designed to calculate and analyze transfer pricing and its subsequent tax implications.

Transfer pricing is a pivotal aspect of international trade and finance, playing a crucial role in determining the value at which transactions occur between associated enterprises. It significantly influences the allocation of income, expenses, and consequently, tax liabilities among different tax jurisdictions. The meticulous computation of tax impact is imperative for businesses to ensure compliance, optimize tax obligations, and foster fiscal transparency.

Objectives

The objective of this algorithm is to perform transfer pricing computations on a dataset from a company, produce the transfer prices and/or make adjustments to the transfer pricing, and, if configured, calculate the subsequent tax impact. This includes both National taxation and bilateral taxation, addressing complex Withholding tax treatments that may arise. Additionally, the algorithm's output can include suggestions for algorithmically improved margin rates that could reduce the overall tax burden.

Feature Overview

The algorithm will present the following features:

• Transactional Net Margin Method for Transfer Pricing computation, based on Entity Profit Level Indicators and a wide range of commonly used Key Profit Indicators
• Royalty and Management fee computation based on selected bases (Sales, OG Sales, specific costs or accounts)
• Transfer pricing adjustment computation
• Tax impact of individual flows with regards to Withholding taxes both in the source and the destination jurisdictions
• Aggregated tax impact on each tax payer including different features of tax systems (losses carry forward, tax credits on WHT...)

Data structure

Algonomia API Framework

The Transfer Pricing Algorithm uses Algonomia API Framework to receive input data and send output data for the computations. In the following sections, it is assumed that data has been transferred to the Transfer Pricing Algorithm using this framework.

Input

The input data follows the usual division required by the Algonomia API Framework : Data, Rules, Other.

Data

The following tables presents the data points allowed as "Data" :

Input Data Points

Role	Label	Definition	Typing	Multiplicity behavior	Mandatory
Matching	ATP Declaring Entity segmentation	Allows to define the segmentation of the data input that corresponds to the base aggregation level for the Transfer Pricing Computation (PLIs will be aggregated at this level of segmentation)	Couple (String; Integer)	Several Values can be defined as "ATP Declaring Entity segmentation", but the Integer has to be unique among the set	Yes
Matching	ATP Tax Payer	Allows to define the segmentation of the data input that corresponds to the aggregation level for the Tax computation, it is necessarily a subset of the ATP Declaring Entity segmentation defined	Boolean	Completes the definition of the ATP Declaring Entity segmentation with a boolean (String; Integer; Boolean)	No, if absent no tax computation are performed
Matching	ATP Counterpart Entity segmenfation	Allows to define the segmentation of the data input that corresponds to the base aggregation level for the Transfer Pricing Computation (PLIs will be aggregated at this level of segmentation), if it is not defined or null for certain data entries the Counterpart entities will be sourced from the associated Rules	Couple (String; Integer)	Several Values can be defined as "ATP Counterpart Entity segmentation", but the Integer has to be unique among the set	No, if absent the Counterpart entity may be automatically defined using the Rules file
Financials	ATP Assets	Represents the assets employed by the entity, which are considered in the transfer pricing computation	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Financials	ATP Capital Employed	Refers to the total capital (both equity and debt) used by the entity in its operations	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Financials	ATP Sales	Denotes the total revenue generated by the entity from sales of goods or services	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Financials	ATP OG Sales	Stands for Out of Group Sales, representing the total revenue generated by the entity from sales of goods or services to parties that are not part of the same group or entity, hence outside of the related or affiliated entities	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Financials	ATP COGS	Stands for Cost of Goods Sold, indicating the direct costs attributable to the production of the goods sold by the entity	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Financials	ATP Royalty paid	Represents the amounts paid by the entity for the use of intellectual property or other assets owned by related parties	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Financials	ATP Management fee received	Indicates the fees received by the entity for providing management services to related parties	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Financials	ATP Operating Expenses	Denotes the daily operational costs of an entity, distinct from other expenses such as COGS and management fees	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Financials	ATP Profit Indicator	A measure or indicator used to assess the profitability of the entity in the context of transfer pricing	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Taxation	ATP PBT	Refers to Profit Before Tax, indicating the entity’s profit before the deduction of taxes	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Taxation	ATP Tax losses carryforward N	Represents the tax losses incurred in the current year (N), where "N" denotes the present or most recent tax year. These losses can be carried forward to offset future taxable profits, subject to applicable laws and regulations	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Taxation	ATP Tax losses carryforward N-1	Represents the tax losses from the previous year (N-1), where "N-1" refers to the year immediately preceding the current year (N). These losses, too, can be carried forward to offset profits in subsequent years, according to the relevant tax laws	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Taxation	ATP Tax expenses	Indicates the total tax expenses incurred by the entity	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Transfer Pricing	ATP Firm Creation Date	Refers to the date on which the entity was established or created	Couple (Decimal;ISO 3 Currency Code)	Not allowed	No
Transfer Pricing	ATP Base for Royalty	Represents the basis or calculation used for determining the royalty payments made or received by the entity	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, assumed to be 0
Transfer Pricing	ATP Cost Base for Management fee	Indicates the cost structure or basis used to calculate the management fees charged or received by the entity	Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, related TPA =0
Transfer Pricing	ATP Consumption Base for Management fee	Denotes the consumption or usage basis used for determining management fees charged to the entity	Decimal or Couple (Decimal;ISO 3 Currency Code)	If multiple defined, are aggregated for computation	No, if absent and required by computation, related TPA =0

Rules

The following tables presents the data points allowed as "Rules" :

Input Rules data points

Role	Label	Definition	Typing	Multiplicity behavior	Mandatory
Matching	ATP Rule segmentation	Allows to define the segmentation level of the Rule component to be retrieved	Couple (String; Integer)	Several Values can be defined as "ATP Rule segmentation", but the Integer has to be unique among the set	Yes
Matching	ATP Counterpart Entity segmentation	Allows to define the segmentation that defines the Counterpart Entity, it is recommended to use the same definition as the Declaring Entity segmentation to allow for smooth computations for the counterpart entities and their tax impacts	Couple (String; Integer)	Several Values can be defined as "ATP Counterpart entity segmentation", but the Integer has to be unique among the set	No, if absent from the data as well, no TP computations are possible
Transfer Pricing	ATP TP method	Identifies the specific transfer pricing method the algorithm will employ to establish and assess arm’s length prices between associated entities
Transfer Pricing	ATP Benchmark fisrt quartile	Represents the lower quartile in a distribution of comparable data, establishing the benchmark's lower boundary for the algorithm's transfer pricing analysis
Transfer Pricing	ATP Benchmark third quartile	Denotes the upper quartile in a distribution of comparable data, setting the benchmark's upper boundary for the algorithm’s transfer pricing considerations
Transfer Pricing	ATP Benchmark target below	Represents the target value of the KPI if the initial value computed is below the ATP Benchmark first quartile
Transfer Pricing	ATP Benchmark target in	Represents the target value of the KPI if the initial value computed is between the ATP Benchmark first and third quartile
Transfer Pricing	ATP Benchmark target above	Represents the target value of the KPI if the initial value computed is above the ATP Benchmark third quartile
Transfer Pricing	ATP in scope	Flags whether a given transaction is considered relevant for the considered entities
Transfer Pricing	ATP Date inferior	Represents the earliest date for which Entities are considered relevant and included in the algorithm's transfer pricing analysis
Transfer Pricing	ATP Date superior	Represents the latest date for which Entities are considered relevant and included in the algorithm's transfer pricing analysis
Transfer Pricing	ATP Rule application modulation	Defines the different conditions under which the Transfer Computation will be launched
Transfer Pricing	ATP accounting Impact for Declaring entity	Defines the accounting implications on the Declaring Entity resulting from the transfer pricing transaction as processed by the algorithm
Transfer Pricing	ATP accounting Impact for Counterpart entity	Defines the accounting implications on the Counterpart Entity resulting from the transfer pricing transaction as processed by the algorithm
National taxation	ATP National tax rate	Input of the applicable national tax rate affecting the entity's income as considered by the algorithm in its transfer pricing computation
National taxation	ATP Tax losses carryforward depreciation	Defines the depreciation applied to tax losses that are carried forward, impacting the entity's future taxable income in the algorithm
National taxation	ATP Tax loss carryforward ceiling for use	Denotes the maximum amount of the tax loss from previous years that the algorithm allows to be utilized to offset current taxable income, before the application of the ATP Share of Tax losses carryforward
National taxation	ATP Share of Tax losses carryfoward	Determines the proportion of previous years’ tax losses, above the ATP Tax loss carryforward ceiling for use that the algorithm allows the entity to carry forward and offset against future profits
Withholding Taxes	ATP WHT	Determines which or whether specific Withholding tax parameters will be applied
Withholding Taxes	ATP WHT Rates - Royalties	Specifies the applicable withholding tax basis on royalties used by the algorithm to determine tax liability on royalty income in the source jurisdiction.
Withholding Taxes	ATP WHT Base - Royalties	Defines the income base to which the withholding tax rate on royalties is applied by the algorithm
Withholding Taxes	ATP WHT Deductibility - Royalties	Determines the extent to which withholding tax on royalties is deductible in the source jurisdiction, impacting the overall tax obligation as calculated by the algorithm
Withholding Taxes	ATP specific rate - Royalties	Refers to the specified tax rate applied to royalties that the algorithm uses to calculate the tax on royalty income in the target jurisdiction
Withholding Taxes	ATP Rate of exemption - Royalties	Denotes the rate at which withholding taxes from royalties are exempt from taxation in the target jurisdiction, as utilized by the algorithm in its computations. The exempted share does not generate tax credits
Withholding Taxes	ATP Tax credits - Royalties	Represents the rate at which tax credits are available in the target jurisdiction against the non exempted shared of withholding tax on royalties, as factored into the algorithm's calculations
Withholding Taxes	ATP WHT Rates - Mgt fees	Specifies the applicable withholding tax rates on Mgt fees used by the algorithm to determine tax liability on royalty income in the source jurisdiction.
Withholding Taxes	ATP WHT Base - Mgt fees	Defines the income base to which the withholding tax rate on Mgt fees is applied by the algorithm
Withholding Taxes	ATP WHT Deductibility - Mgt fees	Determines the extent to which withholding tax on Mgt fees is deductible in the source jurisdiction, impacting the overall tax obligation as calculated by the algorithm
Withholding Taxes	ATP specific rate - Mgt fees	Refers to the specified tax rate applied to Mgt fees that the algorithm uses to calculate the tax on royalty income in the target jurisdiction
Withholding Taxes	ATP Rate of exemption - Mgt fees	Denotes the rate at which withholding taxes from Mgt fees are exempt from taxation in the target jurisdiction, as utilized by the algorithm in its computations. The exempted share does not generate tax credits
Withholding Taxes	ATP Tax credits - Mgt fees	Represents the rate at which tax credits are available in the target jurisdiction against the non exempted shared of withholding tax on Mgt fees, as factored into the algorithm's calculations
Withholding Taxes	ATP WHT Rates - Other transactions	Specifies the applicable withholding tax rates on Other transactions used by the algorithm to determine tax liability on royalty income in the source jurisdiction.
Withholding Taxes	ATP WHT Base - Other transactions	Defines the income base to which the withholding tax rate on Other transactions is applied by the algorithm
Withholding Taxes	ATP WHT Deductibility - Other transactions	Determines the extent to which withholding tax on Other transactions is deductible in the source jurisdiction, impacting the overall tax obligation as calculated by the algorithm
Withholding Taxes	ATP specific rate - Other transactions	Refers to the specified tax rate applied to Other transactions that the algorithm uses to calculate the tax on royalty income in the target jurisdiction
Withholding Taxes	ATP Rate of exemption - Other transactions	Denotes the rate at which withholding taxes from Other transactions are exempt from taxation in the target jurisdiction, as utilized by the algorithm in its computations. The exempted share does not generate tax credits
Withholding Taxes	ATP Tax credits - Other transactions	Represents the rate at which tax credits are available in the target jurisdiction against the non exempted shared of withholding tax on Other transactions, as factored into the algorithm's calculations