The continued economic impact of COVD-19 across the globe has naturally forced or accelerated the process of businesses to review their existing operations and commercial arrangements. Companies have taken stock on the impact of COVID-19 on their financials, business models and supply chains.
For multi-national enterprises (MNE’s), their transfer pricing policies are a critical part of this assessment and they need to reflect the current or future economic reality, not the past. What was an arm’s length transfer pricing policy six months ago may not be appropriate and arm’s length now.
Furthermore, any existing transfer pricing documentation may provide little or no protection in the event of fiscal authority challenge. It is likely in recessionary times that tax authorities will want to collect as much of the appropriate MNE tax take as is reasonable, justifiable and in accordance with legislation and established principles (i.e. OECD Transfer Pricing Guidelines).
The exact impact of COVID-19 on transfer prices continues to evolve, but may include:
- Relocation of functions and risks in the supply chain
- Revised intra group financing arrangements
- Reconfiguration of business model
- Royalty or interest payment holidays
- Treatment of limited risk entities
- Impact of volatile exchange rates
- Consideration of what entities bear any losses
- Provision of intra-group services
Accordingly, MNE’s need to revisit their transfer pricing policies, contemporaneous documentation and other evidence, including contractual arrangements, to ensure that transfer pricing outcomes still reflect the appropriate value add in the supply chain. This challenge is also made more difficult by the fact that cash spent on ‚non-essential items‘ for compliance and other tax related matters may be potentially reduced.
The current environment has made fiscal authorities nervous that in response to the pandemic, MNE’s may not strictly be behaving in, or more appropriately, keeping up to speed with what is arm’s length. For example, what was an arm’s length interest rate on an international financing arrangement pre COVID-19 will likely be very different now. This may well be unintentional as decisions need to be made quickly, flexibly and dynamically. Nevertheless, MNE’s need to revisit their transfer pricing policies regularly in a rapidly changing, unpredictable and volatile environment.
Changing your transfer pricing arrangements in response to the COVID-19 pandemic may lead to unintended consequences and any policy adjustment must always be guided by the overarching principle that transfer pricing outcomes need to be reflective of the value added in the supply chain.
The challenge is keeping one’s transfer pricing policies up-to-date and relevant. They should reflect the existing operational and commercial reality of one’s business, be agile and responsive. Nevertheless, there is a consensus among fiscal authorities that despite the challenges of maintaining contemporaneous documentation, it is business as usual (i.e. they expect the correct amount of tax to be paid in the correct jurisdiction and will seek to rigorously enforce the rules).
There is no doubt that compliance with the transfer pricing rules of multiple jurisdictions is onerous and sometimes expensive. However, if this process is conducted properly it will mitigate risk, reduce the risk of double taxation, potentially decrease overall effective tax liability, provide an opportunity for cash flow improvement and provide the best opportunity to align your transfer pricing policies with your business objectives in the existing COVID-19 world.
Our multilingual and multidisciplinary experts within the Moore Global Network can assist you in navigating this and other complex areas of cross border investment, business and governance and risk advisory matters.