COVID-19 and Transfer Pricing Considerations
Contributed by Kreston
25 May, 2020
As the COVID-19 pandemic continues to evolve, causing substantial shifts in financial markets and the macro economy, there will be direct implications for multinational enterprises (MNEs). As governments enact new restrictions, MNEs will most likely face disruptions to their supply chains and challenges related to moving personnel across borders.
While companies assess the impact of these measures to their bottom line, it may be wise to consider restructuring business models and supply chains to diversify procurement and manufacturing locations, developing new markets to diversify risk, disposing of assets, and integrating new acquisitions.
In an effort to illustrate the expected transfer pricing impact, we have noted the following issues and trends to be aware of moving forward:
- MNEs' transfer pricing arrangements will become a focus for governments in an effort to boost tax revenues. As such, transfer pricing audits will likely spike in tax years in which profit margins have been negatively impacted by the disruptions related to COVID-19. Because of this, it is extremely important for taxpayers to document their transfer pricing arrangements now, including the impact of COVID-19 and any other extenuating factors in the event of a potential audit covering the COVID-19 tax years.
- MNEs must be able to explain to tax authorities that their transfer pricing arrangements were valid during this period and note any unexpected deviations caused by adverse factors beyond their control.
- It may also be necessary to model the impact of COVID-19 on operating results and demonstrate that low profits or losses were not the result of non-arm's length transfer pricing policies.
- Given the significant disruptions in countries such as China, MNEs may need to alter their transfer pricing arrangements and modify their supply chains. Some of these changes may lead to discrepancies, so it is wise to revisit your transfer pricing arrangements to ensure they align with your current supply chain. If there are significant changes, you may need to change your transfer pricing arrangements to ensure they reflect the re-allocation of functions, assets and risks across the group.
- Governments might respond with a range of fiscal stimulus measures such as tax concessions, incentives and rebates. For example, the Chinese government has already introduced some of these measures. Taxpayers should ensure they understand stimulus and tax concessions globally and be assessing whether they are eligible. They should be considering the potential impact on their transfer pricing policies and intercompany structures in this context.
- In the future, given other expenses related to COVID-19 risk mitigation, taxpayers could face tighter budgets for transfer pricing compliance and support. The COVID-19 pandemic may leave MNEs with heavy tax burdens if not managed appropriately; therefore, it is advisable to be proactive and seek out streamlined, cost-effective solutions from a transfer pricing professional in order to effectively manage transfer pricing risks and compliance.
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