While tax relief measures may mitigate the immediate effects of the coronavirus (COVID 19) pandemic on financial performance, sooner or later, chains of multinational entities (MNEs) will need to address the consequences for transfer pricing purposes.
Many enterprises are now facing issues concerning necessary funding for their operations, additional expenses of staff layoffs, or allocating profits and losses incurred as a result of the coronavirus crisis.
Many MNEs operate a business model whereby companies performing certain activities within the limited functions assigned to them—such as limited risk distributors (LRDs), contract manufacturers (CMs) or contract service providers—are gathered around a key entrepreneurial entity. These companies are generally expected to report stable profitability, such as earnings before interest and tax (EBIT) margins for LRDs or mark-ups for CMs between, for instance, 3% and 7%.
In the Czech Republic, many companies operate precisely in this regime—that is, as limited risk entities. Is it realistic to request from them the same profitability as under standard economic circumstances? To answer the question about the “right” profitability of entities with limited functions and risks in the times of crisis, the following issues need to be considered:
Implications in the Czech Republic
Taxpayers in the Czech Republic may draw on experience from the aftermath of the 2007 financial crisis. At that time, the Czech authorities generally required limited entities to report profitability corresponding to their limited risks, while considering the specific circumstances of the transaction and entity. Some of the tax audits focusing on the period following the financial crisis are still pending; hence, there is currently no clear precedent to help entities find the right approach quickly.
Considering the above, it may be prudent not to postpone the preparation of transfer pricing documentation, but to consistently and as soon as possible document the application or deviation from the chosen transfer pricing model during the crisis and immediately after, and to include economic grounds for the applied approaches.
Read an April 2020 report prepared by the KPMG member firm in the Czech Republic
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor 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 on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.