Taxes
18 January 2021

OECD guidance on the transfer pricing implications of the COVID-19 pandemic

OECD Guidance focuses on four priority issues where the additional practical challenges posed by COVID-19 are considered most significant and provides useful discussion of the various factors that should be considered in making arm’s length pricing determinations under conditions impacted by COVID-19.

Martin Zima
Petra Bohovičová

The consequences of the coronavirus (COVID-19) pandemic concern most companies within MNE groups operating in Slovakia. The Organisation for Economic Co-operation and Development (“OECD”) released guidance on the application of the arm’s length principle in the context of the COVID-19 titled Guidance on the transfer pricing implications of the COVID-19 pandemic (“the Guidance”) which offers practical guidance for companies affected by the COVID-19 in Slovakia as well.

The unique economic conditions arising from COVID-19 and government responses to it have resulted in challenges for the application of the arm’s length principle. In order to enhance tax certainty in the face of such challenges, the Guidance attempts to clarify and illustrate the practical application of the arm’s length principle in the context of COVID-19.

The Guidance emphasizes that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 (“OECD TP Guidelines”) should continue to be relied upon when performing a transfer pricing analysis, including under the possibly unique circumstances introduced by the pandemic. Accordingly, the Guidance focuses on how the arm’s length principle and the OECD TP Guidelines apply to issues that may arise or be exacerbated in the context of COVID-19, rather than on developing specialized guidance beyond what is currently addressed in the OECD TP Guidelines. The Guidance represents the consensus view of the 137 members of the Inclusive Framework.

The Guidance addresses many of the most challenging issues raised by COVID-19 for transfer pricing analyses. A common theme of the Guidance is that an appropriate arm’s length response to any issue will depend upon the facts and circumstances of the transaction under consideration. Unsurprisingly, given the range of facts and circumstances encountered by taxpayers and the need for consensus from 137 countries, the Guidance provides general principles for evaluating the arm’s length response without providing specific solutions. Nevertheless, the Guidance is seen by tax professionals as being helpful in that it provides useful discussion of the various factors that should be considered in making arm’s length pricing determinations under conditions impacted by COVID-19. Additionally, the Guidance’s encouragement of pragmatism and flexibility provides a welcome practicality to addressing some challenging transfer pricing issues. It remains to be seen how different tax authorities (including those in Slovakia) incorporate the suggestions in the Guidance in their dealings with taxpayers.

The Guidance focuses on four priority issues where the additional practical challenges posed by COVID-19 are considered most significant.

1. Comparability analysis

What sources of contemporaneous information may be used to support the performance of a comparability analysis applicable for 2020?

  • Can budgeted financial information be used to support the setting of arm’s length prices?
  • Under what circumstances are timing issues most pronounced?
  • What practical approaches may be available to address information deficiencies?
  • Can data from other crises be used to support price setting?
  • How might the period of data used to evaluate arm’s length pricing be established to support a comparability analysis?
  • Would price adjustment mechanisms be appropriate?
  • What actions may be taken to evaluate the set of comparable companies or transactions used?
  • Can loss-making comparables be used?

2. Losses and allocation of COVID-19-specific costs

  • Can entities operating under limited-risk arrangements incur losses?
  • Under what circumstances may arrangements be modified to address the consequences of COVID-19?
  • How should operational or exceptional costs arising from COVID-19 be allocated between related parties?
  • How should exceptional costs arising from COVID-19 be taken into account in a comparability analysis?
  • How may force majeure affect the allocation of losses derived from the COVID-19 pandemic?

3. Government assistance programs

  • Is the receipt of government assistance an economically relevant characteristic?
  • Is guidance on other local market features relevant when analyzing the transfer pricing implications of government assistance?
  • Does the receipt of government assistance affect the price of controlled transactions?
  • Does the receipt of government assistance modify the allocation of risk in a controlled transaction?
  • Does the receipt of government assistance affect the comparability analysis?

4. Advance pricing agreements (APAs)

  • What impact does COVID-19 have on APAs under negotiation?
  • What impact does COVID-19 have on existing APAs?
  • Are taxpayers and tax administrations still bound by existing APAs in light of the changes in economic conditions?
  • Does the change in economic conditions constitute a breach of a critical assumption?
  • How should tax administrations respond to the failure to meet critical assumptions?
  • When should taxpayers notify tax administrations of the failure to meet critical assumptions?
  • How should taxpayers document the failure to meet critical assumptions?
  • How should tax administrations respond to non-compliance with an existing APA?

The application of the Guidance and the practical implications of the COVID-19 pandemic on the transfer pricing of individual companies need to be considered on a case-by-case basis, and we therefore recommend analyzing the economic relationships and controlled transactions individually.

If you are interested in further information, please do not hesitate to contact us.

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