While the world’s attention is focused on the human impact of COVID-19, the economic impact has been catastrophic for many companies globally. Some have retooled, converting their operations to produce essential medical supplies, whereas others are struggling and dependent on economic stimulus packages and goodwill for survival. Another group, unfortunately, will not survive. Currently, companies (both domestic and multinational) are reviewing their businesses and what improvements they can make–both short- and long-term–to survive this pandemic and come away with a sustainable and profitable business model. For multinationals, adjustments to business models will likely necessitate a review of their transfer pricing structure.
There are several key considerations for multinationals:
In the short-term, it is imperative that companies survive. From a transfer pricing perspective, multinationals should continue to abide by the arm’s length principle and take into account how independent parties would deal with similar circumstances in making their decisions. They need to assess the commercially realistic options that are available to them; and look to what independent companies are doing to adapt and survive. Each multinationals’ situation will depend on its specific facts and circumstances, so that decision-making process must be documented contemporaneously.
Contemporaneous documentation is a term often associated with preparing transfer pricing documentation to support a company’s tax return. However, in this context, contemporaneous documentation refers to maintaining a file in which evidence of third-party behavior is captured to support decisions taken to change or adjust transfer pricing models in light of the pandemic. This file can be maintained internally by company personnel. Ideally, this should include at least some high-level consideration of the options realistically available to each party. This data or evidence can be drawn on in the future to support actions taken if challenged by revenue authorities and can also be included in normal transfer pricing compliance documentation.
For a multinational, there may be several different issues in the short term that can be addressed, including:
Transfer pricing is a multi-faceted issue and any change to a transfer pricing model needs to be considered from the perspective of each of the jurisdictions in which the parties to the transactions are resident. One-sided analysis will only create risk for multinational groups. Additionally, a decision to make changes to a transfer pricing model to respond to today’s crisis needs to consider whether the change will create any historical or future risk.
While some of these actions may be seen as non-arm’s length during “normal” times, they are arguably commercially necessary in the current unprecedented economic times. It is critical that taxpayers capture market related data contemporaneously that evidences the transactions being reviewed or contemplated and the commercial reasons for the decisions taken and the pricing implemented. It is also important that the parties agree to revisit any temporary arrangements within a commercially realistic timeframe and that the agreements contain terms and contingencies that reflect how arm’s length parties might impose sunset clauses.
While most of the attention at the moment is on ensuring the survival of the business and keeping the supply chain intact, there may also be opportunities for multinationals to reap some longer-term commercial benefits from the current situation:
Critical assumptions in existing advance pricing arrangements should be reviewed as the current economic crisis may cause them to be triggered. In certain circumstances, this may enable multinationals to explore more favorable terms with the relevant tax authorities based on the current economic situation.
These are volatile and uncertain times. Multinationals must proactively review their transfer pricing arrangements and take whatever commercial actions are necessary to survive this crisis. Some commercial decisions may improve multinationals’ business models and may also provide tax opportunities. All decisions undertaken by multinationals need to be considered carefully and must be supported by market-based data where possible, and be captured and retained in a transfer pricing file for future reference.
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