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COVID-19 — Implications and Considerations for Transfer Pricing

Implications and Considerations for Transfer Pricing

MNEs should consider how transfer pricing is affected by the pandemic and take steps to prepare for the future


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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:

  • Consider whether COVID-19 interruptions and resulting changes in intercompany dealings and behaviours may require a change of or shift in the appropriate transfer pricing method (i.e. the profit/loss split method rather than historically applied transactional net margin method or other methodology; or reduction of markups under a cost plus) for the current COVID-19 phase as well as the transition stage back to the new normalcy.
  • Ensure Comparable Uncontrolled Price (CUP) analyses are sufficiently detailed to account for new product pricing factors (e.g., bulk purchase discounts, extended credit, and rebates) as a result of the COVID-19 pandemic, and consider whether the CUP method continues to be appropriate for pricing intercompany transactions where it may be difficult to find CUP transactions to test the arm's length nature of certain intercompany transactions
  • Consider the functions, assets, and risks profile of companies selected for comparability analyses and look at whether economic downturn adjustments are needed on the comparable data (e.g., MNEs with structures that contain limited risk distributors or contract manufacturers, with significant fixed costs, may have transfer pricing issues arising from decreased demand)
  • Carefully evaluate transfer pricing arrangements to ensure that the financial implications of adverse foreign exchange movements are vested with the relevant company in the group.

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:

  • Maintain contemporaneous detailed records of the specific impact of the COVID-19 outbreak for each jurisdiction in which they operate to ensure appropriate documentation and support of any change in the transfer pricing that has been made.
  • Understand what data needs to be prepared and retained to address future potential tax authority challenges on entity profitability issues during the COVID-19 epidemic.
  • Review intercompany agreements to determine whether these agreements contain provisions related to transfer pricing adjustments in the event of business disruptions and consider whether existing intercompany agreements should be renegotiated to reflect new arm's length realities (consider force majeure provisions).
  • Maintain appropriate documentation in support of any deviation from the tax and commercial operating model followed by the business to account for any potential tax implications that may arise as a result of employees who are in another country (due to local rules on lockdown and quarantine after a period of business travel) and are forced to work from that jurisdiction.
  • Consider the impact of COVID-19 on any Advance Pricing Arrangements (APAs) and review its terms to determine whether they contain provisions related to financial adjustments for unforeseen economic events; without these provisions it may be difficult to argue why an APA shouldn't apply under current economic conditions.

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:

  • Corporate debt markets are changing daily, if not hourly. Therefore, monitoring of changes in the markets is important when setting interest rates on intercompany debt.
  • Additional analysis and support may be necessary for speculative grade borrowers.
  • Many companies may need to unwind or restructure certain debts and consideration should be given to the impact of the current lending environment when doing so.
  • Given cash flow considerations, financial covenants may need to be modified or waived, and PIK options (adding accrued but unpaid interest to the outstanding balance of the loan) may need to be considered. Arm's length practice in the current environment should be considered in this regard.

Business restructurings

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:

Demet Tepe
National Transfer Pricing Leader – Montreal
514 840 5767

Joe Devitt
GTA Lead Partner, Transfer Pricing
416 228 7138

Michael Hoffman
Calgary Lead Partner, Transfer Pricing
403 691 7984

Michael Glaser
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.

© 2021 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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