Recently, New Zealand’s Inland (IR) Revenue has released guidance regarding practice issues for transfer pricing due to the COVID-19 pandemic. The COVID-19 pandemic has created an impact on specific sectors and businesses substantially. The guidance has provided the following pointing to mitigate the impact of the COVID-19 pandemic.
Arm’s length principle
Transactions must continue to be conducted in accordance with the arm’s length principle during the COVID-19 pandemic. Existing guidance continues to be relevant, including the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations – July 2017. IR recognizes that practical difficulties in applying the arm’s length principle may arise during this time. It is critical to have contemporaneous documentation recording specific facts and circumstances businesses face and their compliance with the principle.
Moreover, IR identifies arm’s length support for financial outcomes in its guidance.
Documenting COVID-19 impacts
In documenting their specific facts and circumstances in light of COVID-19, businesses are encouraged to:
- identify and collate evidence to document the nature, duration, and extent of any material COVID-19 related impacts on the group and local business;
- document relevant group and local business responses to the pandemic, including, for example, any changes in business strategies, changes in the characteristics of product or service offerings and so forth;
- identify and explain any changes in the group and local business functions, assets, and risks during the impacted period, including how these relate to the business’ exposure to or mitigation of COVID-19 impacts;
- identify and explain any changes in intra-group transactions and contractual terms;
- document the supporting rationale for any changes to intra-group transfer prices, including why they are considered to be arm’s length in the circumstances; and
- identify the impact of COVID-19 on the overall profitability of the MNE group and the local entity.
As with all documentation, it is the quality of the content that is important, as opposed to the quantity.
Further guidance
New Zealand is actively participating in the OECD’s project to produce global guidance on transfer pricing issues during COVID-19 based on the arm’s length principle. In the meantime, for businesses, there is no replacement for documenting specific facts and circumstances and quantifying relevant impacts.
