For any business in the current climate, there is a critical need to minimise the economic impact of the COVID 19 pandemic as well as to ensure, as far as possible, ‘normal’ day to day operations.
However, for companies and groups with an international aspect, the following are already having transfer pricing implications:
- Intercompany supply chains: some businesses are having to switch to an alternative group company or even a third-party supplier if their associate is in a pandemic-hit area and cannot meet demand. This raises the question of pricing such an alternate supply. Additionally, the presence now of comparable uncontrolled transaction (CUP) may be unhelpful with regard to a transfer price usually applied. This means that, despite CUP being the OECD’s preferable method when reliable data is available, broader consideration and advice may need to be taken.
- Changing market behaviour: this requires a reassessment of the functions performed, assets employed and risks borne by any particular entity in a group, and how this should be rewarded. If there are changes in job roles (for example due to furloughing) or the capabilities of an international group, then this may have an impact on the functional analysis used to appraise arm’s length pricing.
- Access to funding and financing: a multinational business may need to increase intercompany lending in order to manage the working capital needs of its subsidiaries in pandemic-affected areas which again requires an analysis of how this should be priced; This is particularly challenging given the never seen before circumstances impacting the world economy.
In the medium term and beyond, significant state-backed emergency funding being rolled out around the globe will inevitably result in future pressure on tax authorities to boost tax revenues, with each territory in which a business operates vying for their ‘fair share’. Therefore, the transfer pricing operated during the crisis must be defendable and therefore considered. This is unlikely to be a straightforward exercise; computing the economic losses associated with COVID-19 and their allocation will require sophisticated modelling which may require the use of new methodologies unlike those which are traditionally employed. Transfer pricing positions may also need to be considered over longer time periods of time to allow for economic smoothing.
Looking further ahead, the post-COVID landscape is likely to require some level of reassessment of a group’s operating model depending on how well the various key economies’ bounce back’ and an evaluation of the overlaying transfer pricing will necessarily need to follow. Indeed, the timing and the nuanced difference between the various layers of a company, a sector, a national economy and the global economy may mean that ‘bounce back’ is different at each level, and in some cases, the previous status quo may never return. At the time of writing, it is already possible to see, for example in sectors that are traditionally structurally both international and highly leveraged, that fundamental changes to transfer pricing are likely to stay in the midterm for some. Combined, this will have an impact to transfer pricing, which Directors should be aware of.
No official guidance has yet been released by either HMRC or OECD, but we expect this will materialise in the coming months as the true impact on the world economy and international business starts to become apparent. Until then, it is highly recommended that taxpayers prepare and maintain evidentiary support in relation to the weekly or monthly impact of COVID-19 on overall operations, for example:
- Moving cash into or out of affected countries to pay for epidemic-related expenses;
- Changes to transfer prices due to adjustments in supply chains or employee locations and movements.
Price Bailey regularly supports businesses through international structuring, residency considerations, transfer pricing and other relevant matters, including working with our Legal Services department on employment law matters related to planning for and managing an international workforce. For more information, please contact Jay Sanghrajka from our Tax team.
Further, the combination of both Britain leaving the European Union and COVID-19 have resulted in a number of clients seeking assistance on matters relating to VAT and tariffs.
Finally, for businesses looking for support in raising finance, strategic planning or understanding how to model and plan the rebalancing of cash and resources across a group, our Strategic Corporate Finance team, led by Simon Blake, can provide assistance.
This article was written by Sarah Howarth, Manager, from our Tax team on 2nd April 2020. For more information, please contact Sarah on the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.