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Transfer Pricing Alert: OECD Guidance on Transfer Pricing Implications of the COVID-19 Pandemic

22 December 2020


The COVID-19 pandemic caused economic and social devastation leading to unprecedented turbulence in global businesses. The Organisation for Economic Co-operation and Development (OECD) with consensus from 137 members of Inclusive Framework released the guidance on the transfer pricing implications of the COVID-19 pandemic on 18 December 2020. The guidance is helpful for taxpayers in reporting the financial periods affected by the pandemic and for tax administrations in evaluating the implementation of taxpayer’s Transfer Pricing (TP) policies. The guidance should be regarded as an application of existing guidance under the OECD Transfer Pricing Guidelines[1] (OECD TPG) to fact patterns that may arise commonly in connection with the pandemic and it should not be regarded as expansion or revision of OECD TPG.

The guidance focuses on four priority issues (i) Comparability analysis; (ii) Losses and the allocation of COVID-19 specific costs; (iii) Government assistance programmes; and (iv) Advance Pricing Agreements (APAs).

We, at BDO India, have summarised key aspects of this guidance hereunder:

Key Highlights

i. Guidance on Comparability Analysis

The pandemic may have a significant impact on the pricing of transactions between independent enterprises and may reduce the reliance that can be placed on historical data when performing comparable analysis, resulting in information deficiencies.  As per the guidance, taxpayers and tax administrators are to consider practical approaches regarding performance of comparability analysis that is consistent with TP policy of the taxpayer over time.

The guidance lists out the sources of contemporaneous information that can be considered for performance of comparability analysis.

The list includes

  • analysis of change in sales volumes,
  • capacity utilisation,
  • information relative to incremental or exceptional costs,
  • government assistance,
  • macroeconomic information like country specific GDP data or industry indicators,
  • statistical methods for variance analysis,
  • comparison of internal budget data with actual results, and
  • third party behavior observed in previous recessionary periods.

For the information deficiencies to comparable analysis, the practical approaches detailed in the guidance includes use of reasonable commercial judgement supplemented by contemporaneous information, flexibility to allow amendments to tax returns and use of more than one TP method.

The guidance also permits the use of data from other earlier crises by specific delineation of the controlled transaction, revision of comparable companies set based on updated search criteria to include geographical comparability and loss-marking comparables.

ii. Guidance on Losses and Allocation of COVID-19 Specific Costs  

During the pandemic, many MNE groups incurred losses due to decrease in demand, inability to obtain or supply products or services or as a result of exceptional, non-recurring operational costs. The guidance provides that these costs should be allocated based on an assessment of operation of independent enterprises under comparable circumstances and extraordinary costs may be recognised as operating or non-operating items by accurate delineation of the transaction and comparable analysis.

The guidance also details the situations under which the force majeure clauses may be invoked by the associated parties. The emphasis is to analyse the economic circumstances of the commercial arrangement to determine whether, at arm’s length, a party would decide to invoke a force majeure clause, accurate delineation of controlled transaction and the conduct of the parties. 

iii. Guidance on Government Assistance Programmes

Government assistance includes grants, subsidies, forgivable loans, tax deductions or investment allowances and liquidity measures like loan guarantees, direct financing to business on preferential terms, loan deferrals, specific grants and tax reliefs.

There are potential transfer pricing implications on government assistance provided to a member of an MNE group directly or made available to independent parties within the market where an MNE group operates.

OECD in this guidance , acknowledges that economically relevant characteristics of the accurately delineated controlled transaction will help in determining the potential effect of the receipt of government assistance on pricing of the controlled transaction. 

iv. Advance Pricing Arrangements

These material changes in economic conditions due to COVID-19 were not anticipated by taxpayers and tax administrations when the APAs were negotiated. Accordingly, taxpayers may face challenges in applying existing APAs under the present economic conditions.

The OECD in its guidance encourages to adopt a collaborative and transparent approach by raising the issues with the relevant tax administrations and not resolving them unilaterally by the taxpayers themselves.

Most of the APAs include critical assumptions about the operational and economic conditions that will affect the transactions covered by the APA. The market conditions during this COVID-19 pandemic are likely to qualify as breach of critical assumptions. Under these circumstances, the guidance, in specific, deals with how the taxpayer should document such breach and notify the tax administrations and how tax administrations are to respond to such breach of critical assumptions by taxpayers. 

On the APAs under negotiation, potential impediments may arise including restrictions on domestic and international travel; enforced or voluntary working from home; or additional resource pressure to manage responses to the COVID-19 pandemic. The guidance provides for alternative approaches using technology solutions viz virtual tax administration and taxpayer case conferences, virtual functional interview & site visits and electronic documentation sharing (via encrypted emails for confidentiality and security) to maintain progress in APA discussions. 

BDO Comments

Economic turmoil due to social isolation within countries, closed boundaries and industry wide shutdowns have placed world and global businesses in an unprecedented sphere. Fall in demand, and disruption of supply chains have significantly altered the risk profile of MNEs and consequently effected inter-company pricing policy. The OECD guidance on transfer pricing implications during these times can be construed as a referral guide to taxpayers and tax administrations for collaborative and in transparent handling of transfer pricing implications.  

[1] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017