On 19 June 2020 the Australian Taxation Office (ATO) posted to its website guidance entitled COVID-19 economic impacts on transfer pricing arrangements. This sets out guidance for taxpayers affected by COVID-19 who are preparing transfer pricing documentation.

The ATO notes that some businesses may have suffered a reduction in income, increased expenses and lower profits during the crisis. The impact of the crisis may affect the outcome of any benchmarking analysis, especially in the short term. The ATO would therefore look at the facts and circumstances of each case to arrive at an understanding of the taxpayer’s situation.

A clarification of the taxpayer’s position could involve a functional, asset and risk analysis of the Australian taxpayer and its related parties before and after the crisis; the contractual arrangements between the parties; and any material changes in the terms and conditions or in business strategies as a result of the crisis.

The ATO notes that the impact of the crisis on different industries will vary widely. In each case the ATO would attempt to gain an understanding of the profit that would have been achieved but for the impact of the crisis, to find the reason for any increase in the allocation of costs or decrease in sales that leads to changes in the operating margins. In addition to looking at the functional analysis, the ATO would take into account any government assistance received that has had an effect on the business operations in Australia.

Advance Pricing Agreements

The crisis may have resulted in conditions that are not in line with the critical assumptions for taxpayers that have concluded an advance pricing agreement (APA) and the ATO therefore requires taxpayers in this position to report a breach of the terms of the APA as soon as possible. The ATO notes that a review of the APA could result in business as usual; renegotiating the APA over the time period of the demonstrable impact; or suspending or modifying the APA for a set period.

In the case of taxpayers who are still in the course of negotiating an APA the ATO notes that if the taxpayer has been significantly impacted by COVID-19 it will be difficult to progress the APA application without evidence to show the level of impact on the taxpayer’s results. The APA application could be put on hold or could be ended for the moment. The taxpayer could then lodge another application later, when there is a greater level of certainty in relation to the impact of the crisis on its results. In the case of a bilateral APA the other jurisdiction involved in the negotiations would be consulted when deciding on the best course of action.