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Now is Not the Time to Ignore Transfer Pricing

Posted on April 29th, 2020

By Scott Smaistrla

COVID-19 necessitates a reassessment of the existing transfer pricing paradigms of Multinational Enterprises (MNEs). Supply chain disruptions and changes in consumer demand resulting from the COVID-19 pandemic and global recession are impacting virtually all major industries. These disruptions erode profits and will require MNEs to adjust transfer pricing approaches. MNEs also face challenges such as government restrictions on travel and enabling personnel to work remotely.

Three points are well illustrated by Will James in the 16-Mar-2020 BKD, LLP Thoughtware® article Transfer Pricing in the Wake of COVID-19: 1) Transfer pricing audits are anticipated to increase for 2020 and future tax years for MNEs with adversely affected profitability; 2) MNEs need to start preparing for audits now by documenting the arm’s length nature of their transfer pricing arrangements and including evidence and analysis of extraordinary COVID-19 business disruptions that result in lower profitability or losses; 3) Documentation of lower profitability or losses that result from COVID-19 and the recession is particularly important for reduced-profit or loss-making MNE entities subject to profit-based methods guaranteeing minimum returns (e.g., Transactional Net Margin Method).

The following is a checklist to consider:

  • We anticipate that tax authorities around the world will be looking for revenue and will scrutinize transfer pricing to offset reduced tax collections.
  • Transfer pricing policies and intercompany agreements may need to be adjusted to align with changes in the MNE’s value chain to ensure they accurately reflect the MNE’s functions, assets, and risks (for additional context and insight please see Duff & Phelps’ 12-Mar-2020 article COVID-19 – The Expected Transfer Pricing Impact by Douglas Fone, Fabian Alfonso, Jill Weise, Steven Carey, and Ted Keen)
  • MNEs should proactively develop streamlined, cost-effective approaches to manage their transfer pricing risks for a post COVID-19 world.

Now is not the time to ignore transfer pricing risks and planning opportunities. When tax authorities starved for tax revenue begin to audit MNE transfer pricing, they will be looking for ill-prepared MNEs. MNEs that disregard these risks now will be exposed to proposed adjustments and nondeductible penalties.

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