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.