On 18 December 2020 the OECD issued Guidance on the transfer pricing implications of the COVID-19 pandemic. This looks at the impact of the pandemic on areas of the transfer pricing analysis and APAs.

Comparability analysis

The pandemic and the ensuing economic crisis have presented potential difficulties in performing a comparability analysis. As the pandemic may significantly affect the pricing of some transactions between independent enterprises this may mean that less reliance can be placed on data for past years when performing the analysis. Taxpayers and tax administrations will therefore need to look for practical approaches to deal with lack of suitable data. One possibility may be to make appropriate comparability adjustments. The approach to the comparability analysis should be consistent with taxpayer’s transfer pricing policy over the longer term.

Losses and allocation of Covid-19 specific costs

The pandemic has led to a decrease in demand and restrictions on supplies, in addition to additional operating costs, with the result that some MNE groups have incurred losses. As the allocation of the losses between entities in the group is a potential source of disputes, consideration must be given to certain specific issues around Covid-specific costs and the allocation of losses.

The allocation of risks between the parties will affect the arm’s length allocation of profits or losses that are allocated at arm’s length through the pricing of the transaction. The current guidance on the analysis of risks in commercial or financial relations is relevant to loss allocation but multinational groups also need to consider the allocation of exceptional, non-recurring operating costs that result from the pandemic and the economic crisis.

The allocation should be based on how independent enterprises would operate under comparable circumstances. The treatment of exceptional costs in a transfer pricing analysis must be guided by an accurate delineation of the transaction, an analysis of the risks assumed by the parties and consideration of how independent enterprises would reflect the costs in the arm’s length price. Accounting standards should be taken into account in the comparability analysis bearing in mind the characterisation of particular costs as exceptional or extraordinary costs.

Government assistance programmes

Government assistance can affect the transfer pricing analysis if it is provided to a member of an MNE group directly or if it is available to independent parties operating in the same industry, thereby affecting the behaviour of the enterprises involved in potentially comparable transactions. The terms and conditions of the government assistance programmes should be considered in assessing the effect of the government programmes on the controlled transactions.

Temporary support to support businesses during the pandemic may have a different impact on the transfer pricing analysis compared to ongoing assistance programmes covering several years.

Advance Pricing Agreements

The changes in economic conditions due to the pandemic affect many advance pricing agreements (APAs) that cover 2020 and any future financial years that may be affected by the pandemic and its economic consequences. Consideration must be given to how the change in economic conditions has affected the application of existing APAs.

Where APAs are being negotiated by taxpayers and tax administrations they must consider how the economic conditions arising from the pandemic should be taken into account. The OECD guidance looks at the possible impact on existing unilateral, bilateral and multilateral APAs and on any APAs that are currently under negotiation.