SITUATION
Was achieving a global of view of intercompany execution in sight?
It was time for a change. Not because things were at a stand-still, but precisely because they were already in motion. Navigating an increasingly complex and highly scrutinized regulatory environment, while undergoing a business model transformation, created significant challenges for Microsoft’s intercompany execution. Intercompany execution — the process by which transfer prices of goods, intangibles, and services among enterprises under common ownership are calculated, monitored, invoiced, booked and reconciled — relied on an enormous volume of complex spreadsheets. The mechanisms for data collection and review lacked clarity — a major challenge was that the specific data needs of tax had not been incorporated in the original design of the enterprise systems. Cycle time was slow with frequent holdups. And while highly competent staff were assigned to the task, the fragmented and siloed nature of the end-to-end process led to inevitable inefficiencies and risks. The operational challenges were further compounded by the need to align these complex manual processes with the organization’s quarterly financial reporting cycle.
The challenge the client faced — a common one — was that while corporate tax liability is driven by statutory legal entity results, the design of the systems and surrounding processes was geared towards a consolidated/managerial view. In July 2014 Microsoft’s earnings release included the following statement: “Tax provision adjustment of $458 million, or a $(0.05) per share impact, in the fourth quarter of fiscal 2014 related to adjustments to prior years’ liabilities for intercompany transfer pricing that increased taxable income in more highly taxed jurisdictions (“Adjustment to Prior Years’ Taxes”)”.
SOLUTION
A unified team with an end-to-end (E2E) mindset helps Microsoft bring it all together
PwC’s TP intercompany design and execution specialists had worked closely with Microsoft tax professionals on a review of their current state processes, identifying and addressing the challenges. With end-to-end gaps and issues clearly identified, Microsoft’s Senior Director of Finance Systems recognized the need to, and strategic opportunity associated with, automating intercompany processes in the SAP platform and asked for our advice. We brought together a unified team of professionals from PwC’s Tax, Advisory Finance Effectiveness and SAP Finance Transformation capabilities to share leading practices for TP governance and operating models — powered by SAP® — and to consider integrated solutions that would be right for Microsoft.
Implementing an ideal execution model (efficient, risk-mitigated) for TP was the name of the game, including realignment of roles and resources. On the technology side, Microsoft opted to implement our PwC pre-built programs (accelerators) in SAP, which facilitated a robust implementation of TP within the SAP Business Planning and Consolidation (“BPC”) tool and seamless migration of key TP workflows and data. Hand in hand with this effort, Microsoft established a new Operational Transfer Pricing (OTP) Team to oversee intercompany tax function and act as the interface between tax policy and Microsoft’s Intercompany Center of Excellence (“CoE”). This initiative involved engaging the organization’s shared services finance group in TP activities, as well, to improve efficiency and drive alignment. Along the way a significant business model shift, with activities moving among jurisdictions, called for adaptations to incorporate new TP policies, roles and processes. And finally, an unexpected curveball—tax reform. With the right processes, controls and structures in place, Microsoft executives have been able to focus their attention on the strategic picture, rather than getting “lost in the trees”. We quickly helped reconfigure the models and forged ahead. Close communication, strong relationships, and trust among our teams and across functions supported the project from strategy through execution.
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RESULTS
A new transfer pricing execution strategy delivers quantifiable benefits
Having remediated the underlying causes that led to the 2014 financial statement adjustment, and shifting focus from compliance to strategic risk management with an end-to-end approach, Microsoft began to quickly realize significant benefits.
- Creating a single key source of TP data and reducing manual processes have shortened cycle time by five days and virtually eliminated bottlenecks.
- Clear roadmaps and workpapers have enabled replicability and reduced audit risks.
- A go-live future state TP execution platform in SAP is ready to meet changing statutory requirements more quickly and poised to support organizational change across the global enterprise.
Transparency around TP is of paramount importance to Microsoft. The company now has a strategy and a sustainable solution in place that can support both regulatory change and a dynamic business environment.
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