During the outbreak and spreading of the COVID-19 pandemic, many businesses faced or are facing significant cash flow constraints, disruption to their supply chains, or even forced (temporary) closing for business. The long-awaited OECD guidance on the transfer pricing implications of the COVID-19 pandemic was finally published on 18 December 2020.
A plea for practical guidance was made, as taxpayers may struggle in applying transfer pricing rules for the financial years impacted by the COVID-19 pandemic, and as tax authorities across the globe may have different stances on how to deal with the impact.
The OECD guidance on the transfer pricing implications of the COVID-19 pandemic should be regarded as an application of existing guidance under the OECD Transfer Pricing Guidelines (“OECD TPG”) to fact patterns that may arise commonly in connection with the pandemic. It should not be regarded as an expansion or revision of the OECD TPG. The arm’s length principle has been found to work effectively in assessing intercompany prices according to the OECD and should be relied on when performing a transfer pricing analysis under the possibly unique circumstances introduced by the pandemic.
This guidance reads like a FAQ document. It focuses on four priority issues: (i) comparability analysis; (ii) losses and the allocation of COVID-19 specific costs; (iii) government assistance programmes; and (iv) advance pricing agreements (“APAs”).
Transfer Pricing Guidance on Comparability Analysis
The pandemic may have a significant impact on the pricing of some transactions between independent enterprises and may reduce the reliance that can be placed on historical data when performing comparability analyses for current transactions. The OECD recognizes in particular the timing issues and challenges for performing comparability analyses. The guidance details the sources of information that can be used in order to support the performance of a comparability analysis: analysis of changes in sales volumes, capacity utilization, exceptional costs, government interventions, macroeconomic information (GDP and/or industry indicators) and other statistical methods such as regression or variance analysis are referred to as useful.
Transfer Pricing Guidance on Losses and Allocation of COVID-19 Specific Costs
During the COVID-19 pandemic, many MNE groups incurred losses due to a decrease in demand, inability to obtain or supply products or services, or as a result of exceptional, non-recurring operating costs. The OECD emphasizes that the allocation of losses should be linked to the (existing) allocation of risks, and considers how these exceptional, non-recurring operating costs can be allocated between associated enterprises.
Finally, the COVID-19 pandemic has created conditions in which associated parties may consider whether they have the option to apply force majeure clauses, or revoke or otherwise revise their agreements. The guidance contains some pointers on how this could apply.
Transfer Pricing Guidance on Government Assistance Programmes
Government assistance has taken the form of job retention programmes or other broader financial and liquidity supports to ensure that (local) enterprises can continue to operate through the period of reduction in business activity (i.e. loan guarantees, direct financing to business on preferential terms, loan deferrals, specific grants and tax relief).
This government assistance potentially has transfer pricing implications, whether it is provided to a member of an MNE group directly or made available to independent parties within the market where an MNE group operates. The OECD, in its paper, addresses the application of these government assistance programmes for transfer pricing purposes.
Advance Pricing Arrangements (“APAs”)
Taxpayers and tax authorities are bound by existing APAs, unless a circumstance leading to the cancellation, revision or revocation of the APA (such as breach of critical assumptions) has occurred. In its guidance, the OECD gives recommendations and outlines conditions as regards the application of such circumstances, and as regards how taxpayers and tax authorities may deal with them.
The impact of COVID-19 on worldwide economies is enormous. Although the pandemic constitutes a hazard risk, it has led to the exponential crystallization of other types of risks, such as marketplace risks, operational risks or financial risks. The OECD guidance makes it clear that taxpayers and tax administrations need to find solutions in the existing principles and guidance available in the OECD TPG. It emphasizes that the impact must be assessed and documented, and that taxpayers and tax administrations should identify with specificity the economically significant risks, the impact for local entities and how other parties would have dealt with it, taking into account their contractual relations and their options realistically available.
We have a dedicated team of transfer pricing specialists within PwC Belgium ready to assist you. Do reach out to us for further technical insights and assistance on how this may apply to your business.