Transfer Pricing in a time of crisis
The outbreak of COVID-19 has been swift and unpredictable. Its long-term impact is still unclear but as we sit self-isolated in our home offices in the eye-of-the-storm, its impact is already significant. Obviously there is the impact on our social lives, but there is also the impact on our businesses. Your supplier may have stopped manufacturing, some of your staff may still be stranded in various locations unable to travel or your own business may have temporarily halted its operations because employee protection cannot be fully guaranteed or because of a mandatory shutdown by the government. All types of businesses have closed, both at home and abroad. Economies are suffering and will suffer for the foreseeable future. Losses are inevitable. However, with the help of assistance packages recently announced by many governments, hopefully such closures will not be permanent.
While most businesses are suffering under the impact of the corona crisis, others are prospering or pursuing new opportunities resulting in unexpected profits.
Consider your Transfer Pricing
Not only do you need to take measures today to manage the immediate crisis, but the impact of today’s actions may only be felt one or two years from now and may also be challenged at such time.
Transfer pricing is also a crucial issue for your business to consider in this highly uncertain time. You may be considering how to amend your preliminary FY2020 corporate income tax assessments in order to claim a refund or stop ongoing payments, and in this respect transfer pricing should also be considered. Transfer pricing will shed light on how profits or losses are allocated within the group and hence how COVID-19 impacts the results realized in the various countries where your group operates. In addition, there may be tools within your existing transfer pricing structure which can be used to improve cash flow at this time.
Given that the impact of this crisis is unprecedented and unpredictable, the transfer pricing solutions will differ per situation. We have listed the most important points for you that require attention from a transfer pricing perspective.
What should you consider?
…assess the impact of the crisis in terms of supply chain disruptions and which companies within the chain are impacted and how. You should also consider how these disrupted months differ from the “regular” annual business cycle. Where appropriate, you can take action to adjust budgets and pricing, which facilitates immediate cash management. In adjusting prices, consider current market behavior and the reasons for such an adjustment;
…verify what government support can be obtained in the countries where the group operates and the impact this will have on transfer pricing, or what impact transfer pricing can have on the ability to obtain such support;
…verify if the intercompany contracts in place shed light on how to deal with this situation, and check whether this is in line with current behavior in the market;
…verify the impact on intercompany financing and funding needs within the group and the options for improving liquidity (e.g. deferring payments may be an option, if sufficiently evidenced by third party behavior). Where new funding is raised, you should, as always, consider both the perspective of the borrower and the lender and how the markets are evolving;
…verify how third parties are behaving in your particular industry and try to reflect this behavior in the intercompany situation. Consider how the multinational group itself is dealing with its suppliers and customers. In this respect you should also consider whether third parties will start to make major adjustments to their existing contracts, other than, for instance, more minor changes, such as extending payment terms and consider if this can be followed in intercompany contracts;
…gather examples of this third party behavior in the industry, which may reflect the transfer pricing to be applied in intercompany transactions. You will need this to document the choices made in the transfer pricing documentation for FY2020.
Transfer pricing may not be your top priority at the moment as you try to deal with the stressful situation we are currently experiencing. But transfer pricing can also play an important role in your cash management strategy. The choices made today will have an impact in the future and may be challenged. They should therefore be carefully considered and documented. From our self-isolated home offices, we are just a phone call or email away to assist you through this crisis.
For a complete overview of our reporting on tax developments in response to COVID-19, please visit our COVID-19 webpage.