New OECD guidance on the transfer pricing implications of the covid-19 pandemic
On 18 December 2020, the OECD released new transfer pricing guidance on the implications of the covid-19 pandemic which focuses on the 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).
The guidance represents the consensus view of the 137 member countries of the Inclusive Framework. Notable is inclusion of encouragement for both taxpayers and tax administrations to adopt a flexible and collaborative approach to dealing with the unique challenges of the covid-19 pandemic.
On comparability analysis, the guidance acknowledges that the pandemic may have substantial impact on the transfer pricing of intra-group transactions. One proposed solution is to allow for a price adjustment mechanism in controlled transactions which provides flexibility and allows for the adjustment of 2020 prices in a later financial period. The guidance acknowledges that it may be difficult for taxpayers to obtain contemporaneous financial data to run comparability analyses (e.g. when using the transactional net margin method) as there is often a significant time lag between the financial year end of a company and this information becoming available in commercial databases.
The guidance emphasises that the OECD Transfer Pricing Guidelines should be relied on when performing transfer pricing analysis, but it also acknowledges that taxpayers may have information deficiencies that are associated with the covid-19 pandemic. Both taxpayers and tax administrations may therefore need to consider a practical approach to support comparability analyses for FY 2020.
In order to minimise disputes, the guidance encourages tax administrations to consider pragmatic approaches where taxpayers are making good faith efforts to determine arm’s length prices. The suggested approaches include:
the use of reasonable commercial judgement supplemented by contemporaneous information (using the best available market evidence available) to set a reasonable estimate of the arm’s length price;
allowing for an arm’s length outcome testing approach, e.g. by providing for flexibility in the allowance of compensating adjustments to be made before the tax return is filed (where this is legally permissible) and/or ensuring access to a mutual agreement procedure or similar procedure; as well as
allowing for the use of more than one transfer pricing method to corroborate the arm’s length price of a controlled transaction.
With regard to losses and the allocation of covid-19 specific costs, the guidance states that the allocation of risks between the parties to an intra-group transaction affects how profits or losses are allocated at arm’s length. Exceptional, non-recurring operating costs arising as a result of covid-19 should be allocated based on how independent enterprises operate under comparable circumstances. Taxpayers may consider whether they have the option to revise their existing intercompany agreements where this is required.
On government assistance programmes, the guidance states that government interventions should generally be treated as conditions of the market and that the potential effect on pricing will depend on the economically relevant characteristics of the relevant intra-group transaction, an accurate delineation of the transaction and on performing a comparability analysis.
Existing APAs and their terms should generally be respected, unless a condition leading to the cancellation or revision of the APA has occurred. The question of whether there has been a breach of a critical assumption of an APA should be analysed on a case by case basis.
Compared with previous guidance by the OECD, this release is more prescriptive in its request to tax authorities to be pragmatic in resolving transfer pricing issues arising from the covid-19 pandemic. In suggesting practical approaches, the guidance also provides taxpayers with a wider range of potential options to demonstrate that their transfer prices are at arm’s length.
Ruth Steedman, Martin Brooks & Nicolas Boehlke, FTI Consulting
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New OECD guidance on the transfer pricing implications of the covid-19 pandemic
On 18 December 2020, the OECD released new transfer pricing guidance on the implications of the covid-19 pandemic which focuses on the 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).
The guidance represents the consensus view of the 137 member countries of the Inclusive Framework. Notable is inclusion of encouragement for both taxpayers and tax administrations to adopt a flexible and collaborative approach to dealing with the unique challenges of the covid-19 pandemic.
On comparability analysis, the guidance acknowledges that the pandemic may have substantial impact on the transfer pricing of intra-group transactions. One proposed solution is to allow for a price adjustment mechanism in controlled transactions which provides flexibility and allows for the adjustment of 2020 prices in a later financial period. The guidance acknowledges that it may be difficult for taxpayers to obtain contemporaneous financial data to run comparability analyses (e.g. when using the transactional net margin method) as there is often a significant time lag between the financial year end of a company and this information becoming available in commercial databases.
The guidance emphasises that the OECD Transfer Pricing Guidelines should be relied on when performing transfer pricing analysis, but it also acknowledges that taxpayers may have information deficiencies that are associated with the covid-19 pandemic. Both taxpayers and tax administrations may therefore need to consider a practical approach to support comparability analyses for FY 2020.
In order to minimise disputes, the guidance encourages tax administrations to consider pragmatic approaches where taxpayers are making good faith efforts to determine arm’s length prices. The suggested approaches include:
the use of reasonable commercial judgement supplemented by contemporaneous information (using the best available market evidence available) to set a reasonable estimate of the arm’s length price;
allowing for an arm’s length outcome testing approach, e.g. by providing for flexibility in the allowance of compensating adjustments to be made before the tax return is filed (where this is legally permissible) and/or ensuring access to a mutual agreement procedure or similar procedure; as well as
allowing for the use of more than one transfer pricing method to corroborate the arm’s length price of a controlled transaction.
With regard to losses and the allocation of covid-19 specific costs, the guidance states that the allocation of risks between the parties to an intra-group transaction affects how profits or losses are allocated at arm’s length. Exceptional, non-recurring operating costs arising as a result of covid-19 should be allocated based on how independent enterprises operate under comparable circumstances. Taxpayers may consider whether they have the option to revise their existing intercompany agreements where this is required.
On government assistance programmes, the guidance states that government interventions should generally be treated as conditions of the market and that the potential effect on pricing will depend on the economically relevant characteristics of the relevant intra-group transaction, an accurate delineation of the transaction and on performing a comparability analysis.
Existing APAs and their terms should generally be respected, unless a condition leading to the cancellation or revision of the APA has occurred. The question of whether there has been a breach of a critical assumption of an APA should be analysed on a case by case basis.
Compared with previous guidance by the OECD, this release is more prescriptive in its request to tax authorities to be pragmatic in resolving transfer pricing issues arising from the covid-19 pandemic. In suggesting practical approaches, the guidance also provides taxpayers with a wider range of potential options to demonstrate that their transfer prices are at arm’s length.
Ruth Steedman, Martin Brooks & Nicolas Boehlke, FTI Consulting
