Taxpayers need to consider not only the implications of the coronavirus (COVID-19) pandemic on their business operations but also on their tax and transfer pricing obligations.
The impact of COVID-19 raises several practical and tactical transfer pricing issues. The Serbian Ministry of Finance has not yet issued any specific guidance. Still, taxpayers need to consider what could be potential issues for companies in Serbia (both members of multinational enterprises (MNEs) and domestic entities) in the COVID-19 landscape.
Although the COVID-19 crisis presents challenges for day-to-day operations of many companies, some may find new opportunities resulting in unexpected profits under the new circumstances. In any event, future transfer analysis must take into account the factual circumstances of the particular situation for tax periods that include the pandemic—in Serbia, that would be calendar year 2020 and potentially tax periods after 2020 depending on the speed of recovery of the national and global economy.
Another topic to consider is the “entrepreneur/principal model” structure—that is, the business model when there is a central entrepreneur or principal company that usually bears economic risks (in most cases, that owns valuable intellectual property and that is in return rewarded with the residual profit realized by the MNE group).
In Serbia, under a stringent transfer pricing practice, taxpayers would need to note the risks and consider a thorough analysis to determine the facts and circumstances of each limited risk situation before reaching any sustainable and justifiable conclusion.
Elements of the contractual arrangement also need to be considered—for instance, whether the related-party contract contains a force majeure clause, limiting the parties’ obligations in situations beyond their prediction or control. The main question here is whether COVID-19 would be considered as a force majeure event. Properly measuring the COVID-19 loss would also be an issue.
Another question to address is what would a third party do in a comparable situation.
Special care needs to be given to already filed transfer pricing documentation and statements before any conclusion is made, and especially the conclusion that previously limited-risk entities would share the loss occurred due to COVID-19.
A more general issue, applicable both to limited risk entities and those that are not qualified as limited risk entities, is how to conduct a realistic benchmarking analysis for 2020 financial year results and what would be the right timing for this benchmarking. This question is particularly relevant for certain Serbian groups. Transfer pricing adjustments are regularly seen in tax returns in Serbia, in particularly given that commercial decisions may have been made without thorough consideration of the transfer pricing aspects and thus resulting in a transfer pricing adjustment at the end of the year.
One possible solution is postponing the deadline for transfer pricing documentation for 2020 until the financial data for 2020 is available. Another solution may be to change the requirement to calculate transfer pricing adjustment on an annual basis. These are both questions that may need to be presented to the Serbian Ministry of Finance.
Read a May 2020 report [PDF 307 KB] prepared by the KPMG member firm in Serbia
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