COVID-19 necessitates a reassessment of the existing transfer pricing paradigms of Multinational Enterprises (MNEs). Virtually all industries will be adversely affected by the global COVID-19 pandemic. In addition to the impact of a global recession, there will be disruptions to supply chains and reductions in consumer demand. MNEs will face new challenges such as enabling personnel to work remotely and relocating personnel across borders at a time when movement is restricted by governments. These disruptions will erode the profit margins for many companies, potentially requiring MNEs to make significant adjustments to operating returns for the fiscal periods impacted by the COVID-19 pandemic.
In addition, we can anticipate that transfer pricing audits will surge in tax years where MNE profit margins have been adversely affected by COVID-19. MNEs must be prepared to explain to tax authorities that their transfer pricing arrangements were arm’s length during this period and that the unique and extraordinary adverse factors associated with COVID-19 caused unexpected losses. This discussion is especially important if the MNE’s transfer pricing policy is based on any entities in the chain achieving set target profit margin(s) that they will not achieve due to the adverse economy. It is essential for MNEs to document their transfer pricing arrangements now, including a discussion of the key factors to prepare for possible audits covering the COVID-19 tax years.
The following is a checklist to consider:
-MNEs will be required to explain low operating profits or losses to tax authorities. In such cases, it may be prudent to analyze the impact of COVID-19 on operating results to prepare for future tax audits, and to demonstrate that the low profits or losses were in accordance with the arm’s length standard.
-We can anticipate that tax authorities around the world will be looking for revenue and will scrutinize transfer pricing to offset reduced tax collections.
-Transfer pricing policies and intercompany agreements may need to be adjusted to align with changes in the MNE’s value chain to ensure they accurately reflect the MNE’s functions, assets, and risks.
-MNEs should proactively develop streamlined, cost-effective approaches to manage their transfer pricing risks for a post COVID-19 world. Now is not the time to ignore transfer pricing risks and planning opportunities. When tax authorities starved for tax revenue begin to audit MNE transfer pricing, they will be looking for ill-prepared MNEs. MNEs that disregard these risks now will be exposed to proposed adjustments and nondeductible penalties.
Written By Scott Smairstrla, Submitted By Guy Sanschagrin
Over twenty years of experience developing and implementing high-value profit and cash flow enhancement solutions in the areas of transfer pricing, valuation, business process improvement and economics consulting. Frequent speaker at seminars and webinars and have written articles for many publications including being named by Euromoney / Legal Media as one of the leading and most respected transfer pricing advisors in the world.
Our results-oriented practice puts our client’s needs first to enable them to achieve their transfer pricing and valuation objectives efficiently and cost effectively. We offer a practical and flexible approach by combining our technical experience with creative problem solving and personalized service. We collaborate with our clients to identify, evaluate and address risks and opportunities, streamline processes, manage data, optimize resource allocation, address specific project needs and develop in-house capabilities. Our specific areas of expertise include transfer pricing, valuation, cost sharing, process improvement, supply chain management and international business management.
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