Tue, Jul 7, 2020

Insight: Challenges Facing Transfer Pricing in the Age of Covid-19

This article was first published in Bloomberg Tax on June 2, 2020 and reproduced with permission from Copyright 2020 The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com.

Ted Keen and Andrew Cousins, of Duff & Phelps, consider potential transfer pricing issues on which tax administrations and businesses will need to focus in this uniquely challenging environment.

The speed and scale with which Covid-19 has spread around the world, and the lack of precedent for a pandemic of comparable impact within most people’s experience, have found governments and businesses alike unprepared. To avoid overwhelming health services, governments scrambled to impose widespread restrictions on social interaction, on economic activity and on travel, both domestic and international.

This lockdown has had a greater impact for the vast majority of people than the disease itself: many businesses have either been required to close down or found themselves facing sharply decreased demand for their goods and services, while individuals have been subject to isolation and unemployment.

There have been pandemics before, more severe ones at that–the three influenza pandemics of the 20th century killed tens of millions of people–but what marks out the Covid-19 pandemic is the speed with which it has spread through a society more comprehensively globalized than during earlier pandemics, and the impact and scale of government reactions, which will continue to have profound and enduring effects far beyond the effect of the virus itself.

In this respect, transfer pricing and tax practices of businesses affected by the downturn may not be at the center of policymakers’ and multinational enterprises’ focus in the short term.

However, transfer pricing considerations will need to be taken into account by multinational groups generating consolidated losses, because these groups must decide whether and how they support affiliated entities of their supply chains and service networks in order to maintain business continuity.

Transfer pricing is also likely to generate substantial interest from revenue authorities as the 2020 tax year comes under audit. Following a survey of the initial governmental interventions to support individuals and businesses through the first phase of the pandemic, we consider potential transfer pricing issues on which tax administrations and businesses will need to focus.

Immediate Measures

The economic paralysis caused by the lockdown has required immediate upfront action from governments in an attempt to protect individuals’ jobs and to provide businesses with life-support until a path is found back to normality.

The immediate measures taken now by governments and tax administrations have largely been directed at supporting businesses during the lockdown, helping with cash-flow problems, and supporting incomes to cushion the economic impact of the lockdown and to preserve productive capacity. Where countries have the ability to do so, significant fiscal packages have been introduced, e.g. in the U.S., Germany and the U.K.

The Organization for Economic Co-operation and Development (OECD) recently summarized a range of targeted and temporary tax policy and tax administration measures that could be considered by governments to keep households and businesses afloat during the economic emergency. These have included:

  • extension of deadlines to file tax returns and to make tax payments;
  • deferral of tax payments to ease cash flow;
  • remitting penalties and interest for late filing or payment;
  • debt payment plans and suspending debt recovery;
  • quicker refunds;
  • providing early tax certainty where appropriate; and
  • not auditing taxpayers during the crisis (other than in cases of fraud).

We observe widespread governmental implementation of these measures in practice. The most common type of tax measure to enhance business cash flow among countries has been the deferral of tax payments (particularly advance corporate income tax, personal income tax, value-added tax and social security payments), with three-quarters of countries having introduced some such measures. Many countries have also introduced measures to provide business taxpayers with additional time to file tax returns.

The European Commission has given way to lobbying from business and deferred the introduction of the new disclosure requirements under DAC6 by three months. Some countries have introduced measures to allow 2020 tax losses to be carried back against profits of earlier years, while others are increasing the loss carry-forward period for 2020 losses.

In addition to these general relief measures, others have been undertaken by many countries to address unique problems created by the current dislocation.

One example is measures that have been taken to address fears of creating permanent establishments (PEs) when employees are constrained from traveling to their normal place of work. Emergency guidance from the OECD, emphasizing that a degree of permanence is required for a PE and that it must be at the disposal of an enterprise, has been mirrored in assurances that some tax authorities have given to individuals and companies over their residence status.


Further measures will be needed to restore the economy to health as lockdowns are gradually scaled back. Many businesses will inevitably go into administration/bankruptcy, unemployment is already soaring and certain industries may take many years to recover, all of which will impair governments’ ability to collect tax revenue. Governments that have implemented rescue packages for businesses and individuals will need the tax revenues to fund them. We already see the OECD talking of tax policy reform, including solidarity levies, taxes on super-profit and carbon taxes.

While the hospitality and travel industries have collapsed, others including supermarkets, online retailers and delivery services, streaming services, manufacturers of personal protective equipment, etc., have experienced a surge in demand for their products and services. These strongly-performing businesses will offer a tempting target for revenue authorities. This is particularly the case for digital business models, which were already the subject of substantial reform measures being undertaken by the OECD as well as of digital tax measures enacted in certain countries, such as France.

In light of this, pressure on the OECD to deliver on its Pillar One digital tax and Pillar Two minimum effective tax solutions by its original year-end target date has only increased in light of the Covid epidemic. A consensus solution, which was by no means guaranteed even before the Covid-19 pandemic struck, must now contend with the unforeseen pressure on countries to protect their own tax base as they rebuild.

Transfer Pricing Matters

Individual countries’ transfer pricing legislation, and the OECD Transfer Pricing Guidelines are generally designed with a largely stable business environment in mind.

Additional transfer pricing guidance specific to the Covid-19 pandemic would help businesses to act with increased confidence that they will not come into conflict with tax administrations when the years affected by the crisis are examined in future. In recognition of this, the OECD has given itself until the end of this year to prepare transfer pricing guidance relating to Covid-19 issues and has invited contributions for issues from businesses affected.

In the remainder of this article, we consider some of the administrative issues facing tax authorities and businesses currently or in the future, and give thought to what guidance would be desirable from the OECD and individual governments in the unique circumstances of the current pandemic.

Tax Administrative Impact

Tax administrations, like other organizations, are having to adapt to the new situation and this will have an impact on transfer pricing matters as much as on other tax matters. While tax administration employees have, in our experience, continued to work at a fuller capacity during the lockdown period than some may have anticipated, workflows have nonetheless been impeded or re-prioritized in many instances. Tax authorities’ current focus is on implementing critical matters, in particular the government responses to Covid-19, such as job retention schemes.

Consequently, tax administrations in many countries are less likely to be pursuing new audits in the short term, and audits already underway may advance on slower timelines. It is likely that few new inquiries will be initiated over the next few months, leaving a backlog for governments and taxpayers to deal with once the crisis is over. Taxpayers can expect ongoing interaction with tax administrations, including litigation and dispute resolution, to be extended or deferred and delays in progressing non-critical matters are to be anticipated.

In France and Italy, for example, all current audits have been suspended and no new tax audits will be started for the time being. In the U.K., HM Revenue & Customs (HMRC) has written to many business taxpayers to inform them of a temporary suspension on open tax inquiries. Not all compliance work is being stopped in the U.K., but priority is being given to work supporting businesses and individuals and to tackling serious criminal activity and tax avoidance generated by the crisis (e.g. fraudulent schemes set up to obtain refunds or to access government support payments).

Taxpayers with advance pricing agreements (APAs) may well see some of the key assumptions underpinning the APA violated under altered market and economic conditions and so will have to assess the impact. Countries like the U.S. and the U.K. have indicated they will help companies to deal with the impacts of the crisis on existing APAs, though businesses should not anticipate a swift resolution while the authorities are focused on tackling more urgent issues. Ongoing APA negotiations and new applications for rulings are likely to be deferred in some countries. Italy, for example, has placed a temporary hold on issuing tax rulings and responding to new agreements until May 31.

Specific Business Issues

Among transfer pricing issues already being raised with us by clients, a selection that would benefit from official guidance for tax administrations and businesses could include:

  • businesses seeking to manage cash flow and to spread the burden of significant group losses under the crisis this year will be tempted to break with the long-term risk profiles of group entities per their existing inter-company legal agreements;
  • many businesses anticipate consolidation and rationalization in the face of temporary or permanent changes to their market or supply chain;
  • businesses are managing a scattered, isolated workforce and many are experiencing severe budgetary constraints. Immediate business changes may be necessary that cannot be documented contemporaneously by tax and/or legal departments. Transfer pricing documentation may be incomplete or delayed;
  • businesses seeking to maintain a going concern while facing cash flow problems may be looking to reorganize their internal financing more beneficially, just as the external markets grow jittery. Guidance on intra-group loan financing during the crisis would be especially valuable; and
  • data for establishing valid comparables in the changed environment may be unavailable for years after the arrangements now being put in place. Guidance on the acceptable use of alternative sources of data for supporting transactions during the crisis would be most helpful where documentation must be prepared and filed.



The violent economic convulsions of the Covid-19 pandemic are throwing up a range of transfer pricing issues in a uniquely challenging environment; targeted guidance that would help businesses and tax administrations through the worst of the crisis could help to mitigate the build-up of Covid-19- related tax controversy.

Managers are being required to make business and transfer pricing decisions now, in the heat of the moment, often working with limited means in constrained circumstances.

Governments have acted swiftly to support businesses through the worst of the crisis, and it is to be hoped that tax administrations will apply the same supportive attitude towards helping businesses through the transfer pricing challenges that have been created.

The OECD has invited stakeholders to submit information on the issues to be covered by additional Covid-19-related transfer pricing guidance for taxpayers and tax administrations.

We would encourage all affected parties to provide their input in real time, to help make the guidance as comprehensive and useful as possible.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Reproduced with permission from Copyright 2020 The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com.

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