The effects of the COVID-19 pandemic on transfer pricing

The implications of the COVID-19 pandemic for businesses depend, among other things, on the industry, markets and possible actions taken by the relevant governments to mitigate the impact of the pandemic. However, many businesses have experienced declining revenues and profitability during these challenging circumstances. For transfer pricing purposes, multinational enterprises should decide how to respond to these exceptional circumstances and the potential pressure they put on transfer pricing policies.

What you should consider immediately

As intra-group agreements are the starting point of any transfer pricing analysis, companies should, as immediate actions, review and possibly update their current intra-group agreements. The three most important points to remember are the following:

  1. It is important to comply with the agreements since deviations from each party’s agreed rights and obligations often have an effect on the arm’s length price.
  2. Companies should review their intra-group agreements to see how they deal with these exceptional circumstances. For example, force majeure clauses can prove useful and allow or require the parties to deviate from their normal contractual obligations.
  3. If the agreements need to be amended due to the current situation, the company has to determine how independent enterprises would solve the contractual issues. In this respect, the following information may provide valuable insight into the arm’s length terms:
    • the company’s agreements with independent parties and their renegotiated terms;
    • the company’s conduct in its relations with independent parties; and/or
    • the conduct of third parties within the market based on publicly available information.

What you should consider in the near future

The measures needed to adapt the existing transfer pricing policies to the current situation vary. However, at a minimum the companies should consider the following:

  • MNEs with limited risk structures should assess whether the limited-risk entities should bear some of the losses caused by the COVID-19 pandemic and/or the economic downturn caused by the pandemic. Under normal circumstances, limited-risk entities do not assume significant economic risks and are generally expected to earn routine profits under the arm’s length conditions. However, “low risk” does not necessarily equate to “no risk”. In the current situation, it might be appropriate for the limited-risk entities to bear some of the losses incurred by the COVID-19 induced economic downturn.
  • Adjustments to comparables’ data should be considered as it is likely that the currently available most recent 2016 – 2018 averages do not fulfil the comparability criteria, especially as regards the economic circumstances. 2020 data will only be available at the end of 2021, long after any transfer pricing adjustments for 2020 should have been made.
  • Entities that have existing Advance Pricing Agreements (APA) or unilateral pricing agreements with the tax authorities should review and carefully examine the terms of such agreements (especially their critical assumptions) to ensure that the agreements are still binding on the tax authorities. Some pricing agreements may need to be renegotiated.
  • Special attention should be paid to the transfer pricing documentation prepared for FY 2020 for the purpose of avoiding future transfer pricing disputes. In particular, deviations from the standard transfer pricing policy caused by COVID-19 should be carefully documented. In addition, as many MNCs are being forced to restructure their operations, the business reasons behind the restructuring, options realistically available to each party involved, and the value of a potentially transferred business should be carefully considered and documented.

OECD is currently considering its guidance on the effects of the COVID-19 pandemic on transfer pricing. However, as adjustments or supplements to the OECD Transfer Pricing Guidelines require consensus between member states, even in the best-case scenario such guidance will be available only at the end of 2020.

As always, we at Roschier are at your disposal should any concerns or questions related to the issues mentioned above arise.

Author

Merja Raunio 
Senior Advisor
Helsinki
Päivi Mäkinen 
Associate
Helsinki