A Brave New World: Transfer Pricing for Digital Transformation

June 4, 2021, 7:01 AM

As the digital economy becomes the global economy, historically non-digital companies are developing innovations and creating new commercial offerings never before seen. In the active area of digital taxation, companies unfamiliar with the digital tax trends of the past decade can get caught in its crossfire in the course of their digital transformation.

Below, we provide selected excerpts from our Special Report, Digital Revolution: Transfer Pricing on the Global Tax Battlefield. These excerpts highlight digital technology trends that all non-digital businesses are incorporating, which interact with the key tax trends companies must actively navigate. In our special report we expand on the excerpts below, and:

  • present case studies in the healthcare, consumer goods and retail, and industrials and manufacturing industries to describe how these digital taxation issues affect businesses in the regular economy;
  • provide an overview of digital-specific international tax and transfer pricing development trends; and
  • discuss the evolution of future tax disputes, and, perhaps more importantly, how these disputes can be resolved most effectively.


Digital transformation is a confluence of three trends:

(1) cheaper computing power and ubiquitous digital infrastructure; and

(2) more company-specific information collected by machines, sensors, and data providers; and

(3) easier access to service providers or the talent who can harness (1) and (2).

These all factor in to lower operational costs and potentially monetize a company’s existing assets, unveiling profit potential in ways never done before.

Many companies in non-digital sectors may have felt insulated from the impact of the digital economy—simply comfortable creating the occasional app or web-based service offering to meet customer expectations. However, competition is coming from multiple directions. Well-funded digital businesses are now beginning to make use of their pocketbooks to identify unexpected returns and enter markets historically not considered digital. Existing competitors are rethinking old playbooks and making modest digital investments that reap substantial rewards from increasingly savvy customers.

Lastly, start-ups or adjacent incumbents in different regions or sectors are now able to access existing customers with new low-asset offerings that disrupt existing commercial contracts or long-standing practices. Ultimately, digital transformation is intertwined with business agility. Just as outsourcing was a critical trend in the 1980’s to compete against cost competition and foreign competitors, leading to the global supply chain and just-in-time delivery, the digital revolution is even more disruptive, facilitating entry into novel sectors and international markets to succeed in the new global economy.

Figure 1: Industry Sector Views on Digital Transformation (DT)

Bolstering existing or creating more robust supply chains came into sharp focus during 2020. After several years of a worsening geopolitical backdrop for trade, the moving epicenter of the pandemic made it clear that supply chains needed to become materially more resilient. Digitalization of supply chains has been pointed out as a solution via the use of streamlining their supplier selection process, facilitation and management of supplier relationships and logistics and shipping processes, and automation. We noted in our flagship report, License to be Bold: Transforming Industrials, however, that at the beginning of 2020, 72% of the leaders surveyed agreed that the legacy footprint of their company was leaving them exposed to trade volatility.

Just as the trade war was a shock to supply chains, the Covid-19 pandemic was a shock exacerbating the need to be more digital. In the same survey, 58% of respondents across all sectors who had not yet begun a digital transformation program reported that Covid-19 had accelerated their plans. The companies most successful in the “K-shaped” recovery are those with a heavy commercially digital presence, who could operate remotely, and were resilient and insulated from human or physical asset disruptions arising from the pandemic—namely, those who had already engaged in a digital transformation or were predominantly digital.


The move to digitalization, especially by companies that are not in the technology sector, raises universal transfer pricing questions, which companies must be prepared to answer. These questions include:

  • Who owns valuable intangibles that are created as a result of digitalization and operation of the business following digitalization?
  • In what ways has “going digital” changed the value chain for the company and existing intercompany arrangements?
  • Are the transfer pricing positions of the company still defensible and, if so, are they properly documented and supported?

In essence, all these queries are related to the essential question introduced by BEPS as to whether the evolving relocation of taxable income across the countries in which the company operates is aligned with where value is created through digitalization.

In this section we discuss the many digital transformation forces; the transfer pricing data control, analysis, and potential IP creation associated with non-digital companies “going digital.” See our Special Report for case studies of transfer pricing considerations for three historically non-digital industries.

Digital Transformation Forces

Digital transformation has been driven by a variety of technological forces that have fundamentally shifted the behavior of businesses and consumers.

Below we identify certain digital transformation forces that have impacted the global economy. In our Special Report we explore their respective impact on businesses.

Figure 2: Digital Transformation Forces by Industry

How Digitalization Forces Change the Mindset About IP Creation and Data Control

Digitalization has the potential to fundamentally change how traditionally non-digital businesses create value. As these businesses transform, they should re-evaluate their transfer pricing to identify new ways in which the business is creating value, and ensure intercompany transactions and pricing, and the resulting allocation of taxable income across jurisdictions, are structured to align with value creation.

For example, manufacturers and energy companies that rely increasingly on automated machinery monitored by Internet-connected devices, with a remote workforce monitoring the process and remote engineers designing the machinery and monitoring software, will need to consider where value-added functions are performed and how much of the resulting profit should be left in the jurisdiction where the manufacturing or extraction happens.

As companies start to collect more and more data about customers, users, their supply chain, or manufacturing processes, they must consider a bevy of new questions. For example, how will they use this data? If someone analyzes the data, where do they sit? Who designed algorithms or programs to analyze and use the data? If AI or machine learning is combined with data to create valuable insights, which jurisdiction should get credit?

Taxing authorities may claim that value is created within their borders due to local data collection. However, the real questions are: Where is the data made into a usable data set, who (or what) finds insights in the data, and how are those insights exploited to create value? Also, certain jurisdictions may become centers of excellence in data mining and training AI, with China and the U.S. currently leading the pack. If the expertise developed in those jurisdictions are leveraged globally, should it be remunerated and how?

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Martin Bell is a transfer pricing manager with Baker McKenzie in Singapore. Tamara Levin is a partner in San Francisco, Carlos Linares-Garcia is a principal economist in Monterrey, Andrew O’Brien-Penney is Director of Economics in Chicago, and Gene Tien is a principal economist in Palo Alto.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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