COVID·19; Transfer Pricing Considerations

The unprecedented effects of the COVID-19 pandemic on economies of the world have disrupted plans and budgets of business activities wreaking havoc on the global economy. Multinational Enterprises(MNEs) must consider the consequences of the crisis so that the associated risks can be handled efficiently as quickly as possible. A period of economic crisis, or downturn, will undoubtedly affect how companies price their intra-group transactions. Therefore, given that transfer pricing considers the arm's length nature of prices charged between related parties, a revised transfer pricing method might be appropriate for different areas in the current environment.

Amongst other areas of transfer pricing impacted by the pandemic, this article examines how the pandemic is reshaping the usual way of carrying out business dealings/transactions in terms of business restructuring,  intra-group financing, benchmarking studies, and transfer pricing documentation.

Impact on Business  Restructuring

In 2010,  the Organisation for  Economic Co-operation and  Development (OECD)  included in the Transfer Pricing Guidelines a new Chapter   IX on transfer pricing aspects of business restructurings. This new chapter,  on the one hand, points out that the arm's length principle applies also to business restructurings and on the other hand,  it recognizes the difficulty in finding similar transactions among independent parties. Considering this,  the OECD  requires taxpayers to prove that business restructuring has not been carried out only to achieve tax savings but for commercial reasons such as generating economies of scale or improving a particular process (e.g. innovation). 

Due to the COVID-19 outbreak, members of various MNE  groups are under heightened pressure to restructure, renegotiate, or even terminate their current contractual arrangements with related parties. For example, MNEs which procure from a single source would seek to restructure their supply chain to prevent any disruptions that can have devastating effects on the supply chain and affect business continuity.   Other  MNEs may consider temporarily shutting down or downscaling operations as a form of restructuring.

These restructurings will birth new supply chains among multinationals. As a result, MNEs will not only have to analyze the remuneration provided from one related party to another in terms of the new supply chains but will also have to apportion the restructuring cost-sharing between their subsidiaries. It will be necessary, in this context, to assign restructuring and closure costs in accordance with the arm’s length principle. This allocation of restructuring costs will have to be duly documented, taking into consideration the structure adopted by independent parties, for purposes of potential future transfer pricing audits.

There should be no presumption that all contracts terminated or substantially renegotiated should give right to indemnification at arm’s length, as this will depend on the facts and circumstances of each case (OECD Transfer Pricing Guidelines). Considering the existence of possible compensation clauses in existing contracts, compensation relating to the termination or renegotiation of intra-group contracts will have to be carefully reviewed.

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