What will Transfer Pricing look like after Covid 19?
What will Transfer Pricing look like after Covid 19?
The COVID 19 crisis is clearly affecting all of us, with a severe impact on individuals, businesses and the economy. While the focus now is on minimizing the negative implications, companies will have to deal with the tax and transfer pricing consequences of the COVID-19 crisis once things get back to normal. In this context, will transfer pricing look the same? Will this be a possible picture?
Before
- Cross border transactions and resulting taxable profits were the key focus of the tax authorities in determining accurate transfer prices.
- Allocation of profits between countries and profit margins derived from digital transactions were monitored.
- Aggressive tax planning operations involving various tax jurisdictions were challenged.
- Substance based burden of proof was required.
After
- Profit margins will fall in some sectors.
- Commercial flows will be reorganized and taxable profits will suffer a variation.
- Digital transactions will increase all over the world.
- Many countries around the world will pay close attention to collection of taxes, as their main tool to balance the state budget and support economic recovery.
What should you do?
- Adjust transfer pricing policies in the light of COVID 19’s impact on the business.
- Monitor the operating profitability within the group and prepare careful documentation for loss making subsidiaries.
- Determine the economic losses associated with COVID 19 – which most likely will require sophisticated economic modeling and income-based analysis.
- Analyze the transfer pricing positions over longer periods of time (five-ten years) to allow for economic smoothing and understand the impact of the potential global economic downturn.
- Care should be paid to benchmark studies, as these are one year behind and will not accurately reflect the arm’s length nature of 2020 and future intercompany transactions.
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