On 18th December 2020, the OECD released transfer pricing guidance in the context of COVID-19, covering issues such as comparability analyses, the allocation of losses/costs between group entities, and the termination or renegotiation of existing intercompany agreements. Given the onset of year-end closing for many companies, it will be important to proactively assess the impact of COVID-19, any adjustments required for this fiscal year, and determine appropriate support for transfer pricing compliance and a sustainable approach going forward.
The unprecedented economic impact of COVID-19 has led to practical challenges for many companies. During this period, many multinational enterprises (“MNEs”) have faced disruption to their supply chains, undergone changes to their business models, and have been required to scale down or close their operations during lockdown periods. This has resulted in reduced output and revenues, constraints in cash flow, and volatile profitability for many companies.
MNEs applying transfer pricing rules for the financial years impacted by the COVID-19 pandemic will need to allocate profits (or losses) in accordance with the arm’s length principle, and to anticipate potential questions and challenges from the tax administrations which will evaluate their submissions.
On 18th December 2020, the OECD released a paper on “Guidance on the transfer pricing implications of the COVID-19 pandemic” (“OECD Guidance”), focusing on how the arm’s length principle and the OECD Transfer Pricing Guidelines released in 2017 (“OECD TPG”) apply to issues arising in the context of the COVID-19 pandemic. These include comparability analyses, the allocation of losses and COVID-19 specific costs between entities in a group, and direction on how to manage existing intercompany and Advanced Pricing Agreements (“APAs”).
This article aims to place this guidance in the context of the practical questions being asked by many companies, including:
- Which entities should bear the costs/losses incurred as a result of COVID-19?
- How should companies manage existing agreements?
- In both setting and testing prices, what are the challenges around comparability, and what are the options to address this?
- What other options are tactically available in the short term to manage capital requirements and tax risk?
- Is there a need for a longer-term policy adjustment, or restructuring?
- What are the next steps to implement this in a sustainable way?