On Friday, 18 December 2020, the OECD issued a document entitled "Guidance on the transfer pricing implications of the COVID-19 pandemic". These guidelines provide commentary and illustrations on the practical application of market gap principles on four priority issues:
- the effects of COVID-19 on comparative analysis;
- allocation of losses and extraordinary costs related to COVID-19;
- the impact of government aid programs on pricing;
- how to proceed with issued/not yet issued binding assessments
Let me make some of the most important recommendations:
1. Transfer pricing documentation
In any analysis of the effects of the COVID-19 pandemic on transfer pricing, companies should seek to document how and to what extent they have been affected by the pandemic in terms of the following risks:
- market risk as the demand for some products and services has collapsed;
- operational risk as the pandemic has disrupted supply chains and stopped production;
- financial risks because costs of borrowing have risen in some industries and customers are paying late or not paying at all.
2. Obligation to compile a comparative analysis for 2020
If a controlled transaction is covered by an existing intra-group agreement that, under normal circumstances, a party should receive an agreed fixed income for, e.g. 5 years, and that the parties would normally remain bound by that agreement, there may be no need to perform a comparability analysis for the financial year ("FY”) 2020 provided that the facts and circumstances of the well-defined audited transaction have not changed.
3. Obligation to make price adjustments for 2020
One of the possible recommended solutions to the uncertainty caused by the COVID-19 pandemic is to propose that tax administrations, on the basis of national legislation, allow the adjustment of prices relevant to FY2020 through adjusted invoicing made at a later date (probably FY2021), when more accurate information will be available to determine market prices under normal conditions.
We are also preparing a webinar on this topic with Mr. Vítězslav Kapoun, Head of the International Taxation Department of the General Finance Directorate. The webinar takes place on January 26, 2021 and you can register here.
4. Modification of contractual conditions - allocation of losses
The COVID-19 pandemic has created the conditions under which associated parties can consider whether they can use force majeure clauses, cancel or otherwise revise their intercompany agreements. This may have an impact on the allocation of losses.
Although transfer pricing terminology commonly uses the term "limited risk" the OECD Guideline does not define it. As the functions performed, the assets used and the risks assumed by "limited risk" entities differ, it is not possible to establish the general rule that the entities thus described should or should not incur losses.
We recommend a review of existing contracts, or their modification in cooperation with our specialists from the legal department.
The OECD material is relatively extensive, as is the whole issue of transfer pricing. We encourage you to prepare up-to-date transfer pricing documentation for 2020, which fully documents the impact of COVID-19 on your industry and business, as well as management's transfer pricing decisions to survive the economic impact of the pandemic.