The ongoing COVID-19 crisis highlights how much the arm’s length principle – the cornerstone of transfer pricing providing a minimum level of tax certainty to multinational groups in their intragroup transactions – is hard pressed to accommodate the economic uncertainty created by the pandemic.
Since April 2020, numerous requests have been made to the OECD to comment on and clarify the application of this principle in a pandemic context that has severely impacted the financial period ended on 31 December 2020, in particular.
In response, on 18 December 2020, the OECD published “Guidance on the transfer pricing implications of the COVID-19 pandemic,” addressing the urgent need to provide taxpayers and tax administrations with practical and pragmatic guidance to evaluate transfer prices in this context, in light of the arm’s length principle which remains the rule.
The objective is clear: “to find a reasonable estimate of an arm’s length outcome.”
After consultations with the members of the OECD’s Inclusive Framework and with businesses, the tools and solutions recommended in this guidance focus on four priority issues.
1 - Comparability analysis: the guidance opens the way to a pragmatic approach, suggesting several possible avenues notably in terms of: comparables searches (e.g. various sources of information), period to be taken into account, adjustments and financial data to be taken into consideration. Reliability, however, is still required in this area, making comparability analyses all the more complex in this context.
2 - Losses and the allocation of COVID-19 specific costs : while the guidance outlines some solutions for justifying losses and reallocations of costs, they will nonetheless have to be consistent with a precise and close analysis of the risks and the commercial and financial relations between the associated parties.
3 - Government assistance programs: direct or indirect aids granted to businesses by States or other government bodies can alter the balance of a transfer pricing analysis. Given the myriad forms in which these aids appear (nature, duration, sectors, etc.), a quite precise analysis of their economic impacts on the controlled transactions is required. The OECD’s guidance therefore mainly undertakes to offer some examples, leaving it for the taxpayer to develop an analysis of the characteristics of such aids and of their potential effects on both the tested and the comparable transactions.
4 - Advance pricing agreements: the current disruption of economic conditions is impacting the unilateral, bilateral and multilateral transfer pricing agreements already in place or under negotiation. The OECD’s guidance therefore calls for a collaborative and transparent approach to fostering the legal certainty sought by such agreements. The OECD describes an array of “good practices” to be adopted in this context in order to take into account the effects of COVID-19 on APAs.
While this guidance is useful for managing transfer prices during the ongoing health crisis period, it will not lighten – and may even increase – the burden on businesses to analyze, document and justify their transfer pricing policies and the associated adjustments made to them.