MNEs should consider how transfer pricing is affected by the pandemic and take steps to prepare for the future
COVID-19 is disrupting global supply chains and causing production issues and travel concerns. Now more than ever, the integrity of a business's transfer pricing framework will be tested as operating losses for entities throughout Multinational Enterprises' (MNEs) value chains disrupt the targeted, routine returns that underpin many organizations' transfer pricing frameworks.
This article highlights a few of the many transfer pricing implications of the COVID-19 pandemic, and provides possible actions that Multinational Enterprises (MNEs) can undertake to address the transfer pricing changes that may have to be made and to help prevent future disputes with tax authorities.
Comparability in testing transactions
While a business's financial results and forecasts reflect current economic conditions, this is not necessarily true for available comparable data. Consequently, businesses may face significant comparability issues that can impact how comparability analyses are undertaken. As a result, businesses will have to:
Documentation compliance and future audits
Taxpayers will face new challenges in terms of both compliance with documentation requirements and future transfer pricing audits as a result of COVID-19. Businesses should consider taking action to:
Control of risk
Businesses should ensure they have comprehensive contemporaneous transfer pricing documentation that supports the actual conduct and control of critical functions and risks relating to the management of the crisis (i.e., if the COVID-19 crisis is mismanaged which entity should bear the resulting losses?) Tax authorities may also expect taxpayers to perform a more detailed analysis of their intercompany transfer pricing arrangements that appropriately accounts for the nuances and complexities introduced by the current economic environment.
Related party loans
Although central banks are cutting key interest rates and long-term yields for government debt are at historical lows, interest rates are increasing for corporate borrowers as a result of the liquidity crisis. Due to the monetary policy measures that have been implemented, there is a tremendous amount of new investment grade debt being placed. Although the liquidity crunch has eased somewhat for speculative grade borrowers, there is still a limited amount of activity in primary markets at the speculative grade.
MNEs should be aware of the following:
Many businesses will consider restructuring their global business operations during, or after, an economic recession. Although the COVID-19 pandemic may present a need to restructure, MNEs still need to be aware of the potential transfer pricing implications of business-driven restructurings and ensure that they take the required actions to comply with applicable transfer pricing rules in all affected jurisdictions. MNEs should also maintain the requisite level of documentation to support the business and commercial rationale for such business restructurings and policy amendments to avoid the likely scrutiny and audit challenges by tax authorities in years after the pandemic.
Cash repatriation and management
As businesses face a sustained decline in their sales and profitability levels, many companies will have cash flow issues. MNEs will need to pay close attention to cash management across the group to withstand the economic effects of the expected recession. Businesses should consider tax-efficient cash repatriation strategies to ensure effective utilization and deployment of cash to critical operations to ensure continued business viability.
We can help
As the COVID-19 pandemic persists, businesses will have to adapt, and industries may be transformed in unforeseen ways. From a transfer pricing perspective, we can help your business understand the implications of this disruption. Through careful consideration of transfer pricing and economic theory, the evaluation of heuristic approaches, and collaboration with tax advisors and operational personnel, companies can start work now to chart an appropriate course forward.
To learn more about the topics discussed in this article please see our full length paper "COVID-19: Implications and Considerations for Transfer Pricing" or contact a member of our transfer pricing team for assistance:
National Transfer Pricing Leader – Montreal
514 840 5767
GTA Lead Partner, Transfer Pricing
416 228 7138
Calgary Lead Partner, Transfer Pricing
403 691 7984
GVA Lead Partner, Transfer Pricing
604 691 3165
Information is current to April 8, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500.
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