In mid-December 2020, OECD published “Guidance on the transfer pricing implications of the COVID-19 pandemic” (“Report”) with the purpose to clarify and specify how the OECD Transfer Pricing Guidelines should be applied concerning the different transfer pricing issues that may have arisen during the pandemic.
The Report highlights four priority issues:
- Comparability analysis;
- Losses and the allocation of COVID-19 specific costs;
- Government assistance programs; and
- Advance pricing agreements (APA)
These issues above contain several technical aspects on how the comparability analysis shall be made during the pandemic, for example aspects that should be considered and similar. However, in order to make this post as clear as possible, we have decided to focus on aspects you should have in mind during the pandemic. We have also decided to include some of the most frequently asked questions. These questions are also included in the Report. Kindly note that our post is only a compilation of the Report, and if you have any questions regarding how you should act, please feel free to contact us.
Many companies have seen a significant decrease in demand for goods and services and many companies have reported losses and lower margins during the pandemic, and it is no surprise that several groups review their transfer pricing models. The conditions are clearly not the same as they were before the pandemic. OECD admits this in their report and stresses that it may be reasonable to review and possibly change the transfer pricing models/remuneration levels during the pandemic. Every change should be carefully analyzed, and OECD mentions a few of them and stresses the importance of analyzing and document every aspect of it:
- How sales/demand/production have changed compared to the prognoses/budgets,
- The risks that have materialized during the pandemic,
- If companies have received economic support, the kind of support and how it has been treated from a transfer pricing perspective (depending on the pricing methods, additional aspects may arise),
- If any exceptional costs have arisen due to the pandemic and the party who has borne these (note that these costs should potentially be removed when calculating the remuneration/price for an intra-group transaction),
- If the company is to bear a loss during the pandemic, why this is the case and why it is reasonable from a transfer pricing perspective (see the section below as well),
- If the company renegotiate intra-group agreement, what the differences are and how these are compatible with the arm’s length principle,
- If there is an APA, if any critical assumptions cannot be met. A continuous communication with the relevant Tax Authorities is very important, the earlier the better.
Kindly note that the analysis should be made on an entity level, and not on a group level. It is further uncertain if it is enough to only refer to how the industry in general have been affected by the pandemic, but probably not. Further, the transfer pricing documentation should also be updated to reflect the changes and the new circumstances.
Can our low-risk subsidiary report a loss during the pandemic?
It depends on the circumstances and if similar entities have reported a loss. If this is the case, OECD does not preclude that you may report a loss. OECD however stresses that if the loss is due to a risk that has not been borne by the entity before materializes, it could be questions if the subsidiary should bear the risk only during the pandemic.
Can we use our data from the financial crisis or other similar crises?
Many companies have asked whether it is possible to use historical data from previous crises to price intra-group transactions during the pandemic, for example data from the financial crisis in 2008. OECD stresses that even if the crises may have superficial similarities, each crise and how it affects the markets/industries is unique. This is particularly true for this pandemic.
The impact of Corona can manifest in different ways, and as the OECD prescribes, it is therefore important that the impact of the pandemic is carefully analyzed and documented. Some practitioners recommend having a separate COVID-documentation that includes the aspects we have mentioned in this post. If the company/group decides to have a separate file or extend the general transfer pricing documentation is optional, most important is to have the information available. After all, we believe that the Tax Authorities will use this Report and like the years after the financial crisis, we believe there is a risk that the number of audits will increase.
If you have any questions or need assistance with how to manage the effects of the pandemic, please do not hesitate to contact us.