Transfer Pricing in S/4HANA
Intercompany product transfer solution to accommodate transfer pricing and tax determination requirements:
In modern SAP system it is achieved through Material Ledger parallel valuation and transfer pricing functionality.
Considerations: Business Challenges and Accounting / Tax Requirements
- It is common that global companies operating in multiple markets have large volume of inter-company transactions
- An increasing trend of supply chain tax optimization models adds to the complexity
- These present the following challenges:
- To design a consistent methodology in costing/inventory valuation to track Inter-Company Profit in a mixed environment of both local and group functional currency
- Segmented P&L to satisfy arm’s length transfer price requirement per tax regulations pursuant to various tax jurisdictions
- US GAAP requires that all I/Co revenue and expense items recorded by a group must be eliminated fully in preparing the consolidated income statement. Profits and losses recorded on transfers are deferred until the items are sold to a third party.
- The unrealized transfer profit eliminations should ensure that only the cost of the inventory to the consolidated entity is included in the consolidated balance sheet when the inventory is still on hand and is charged to cost of goods sold in the period the inventory is sold to a third party.
- Additionally, US GAAP requires the recognition of the deferred taxes on intercompany profits in inventory at the seller’s tax rate.
Courtesy SAP SE
Material Ledger is the Basis for Transfer Prices
- Traditionally Material Valuation gives balances for every inventory account in company code local currency
- Material Ledger gives balances per inventory GL account in multiple currencies – these values are now included in the universal journal in S/4HANA
- Material Ledger also provides ways for multilevel actual costing. This can be performed using a costing run as before.
- Also the Material Ledger enables Parallel Valuation / Transfer Prices. Parallel Valuation handles Legal, Group and Profit Center Valuation
Components of ML Transfer prices functionality:
- Legal Valuation
- Group Valuation
- Transfer Prices / Internal Profits
- Intercompany profit elimination
Group Valuation: (Std Inventory Represents Group Value excludes Mark-up)
- ML actual costing function can automatically capitalize/liquidate IC markup and FX at month end.
- Most granular level report by SKU/plant and valuation type (if applicable) with IC markup and FX throughout the supply chain
- ML is the only practical option if the supply chain model becomes complex and versatile (e.g. in-house production part of the global supply chain).
Legal Valuation (Std Inventory Represents Legal Value includes Mark-up)
- ML actual costing function can automatically trace IC markup.
- Most granular level report by SKU/plant and valuation type (if applicable) with IC markup throughout the supply chain
Profit Center valuation focuses on management prices agreed e.g. between divisions
Business benefits Of Transfer Prices
- Profitability Analysis on any dimension
- Customer Profitability
- Product Profitability
- Project Profitability
- Sales Order Profitability
- Profit Center etc.
Foundation for Legal Consolidation
- Built in Elimination of Profit in Inventory
- Built in Elimination of Intercompany Sales and COGS