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Transfer Pricing in a COVID-19 World

Transfer-pricing practitioners often have to explain the challenges a multinational faced during a given tax year—maybe a supply-chain break, an abrupt change in market conditions, and of course, losses. With its stay-at-home orders, supply-chain disruptions, and fluctuations in demand, COVID-19 has left its mark on businesses, healthcare, the global economy, and it will certainly affect how you approach your transfer pricing documentation in 2021.

The good news—if you strategize on the following key elements, your compliance prognosis is good.

Transfer Pricing Policies: It’s key to stay on top of transfer-pricing policies—those documents that dictate how you arrive at your transfer prices—and make sure that the reality of your business transactions reflect them.

Unfortunately, COVID-19 threw all realties out of whack—and it may have also thrown your transfer-pricing policies out of alignment with your business. Re-visit those policies—and maybe even renegotiate them to reflect current third-party contracts—to insure they reflect COVID-19’s “new normal.”

Losses: In terms of transfer pricing, the key to handling losses is to unequivocally show that those losses have nothing to do with your transfer prices. In this case, you’ll want to prove that they’re solely related to COVID-19.

The question is—how are you going to allocate them? Should COVID-19-related losses be treated separately?

Look at local market conditions and see how they’re being treated by other businesses and governments.

Comparables: Preparing a rock-solid benchmarking analysis is almost always the hardest part of transfer-pricing documentation. Industry classifications aren’t set up for transfer pricing and comparables often don’t exist where you need them to. And now COVID-19. Market conditions have changed and comparable companies may not be affected the same way as the taxpayer, which could throw off comparability.

If you rely on old benchmarking data, you might run into problems setting prices for the current year as well as budgeting for the future. The first step is to analyze your comparable data to determine if it still reflects current market conditions.

For fresh benchmarking search, local market comparables are the most reliable way to show market conditions.

Documentation: Keeping track of the details is a constant part of transfer pricing, pandemic or not. So, it’s important to document COVID-19’s impact in real time. Remember, transfer-pricing audits come up a few years after the fact when the impact of the pandemic on your business might not be top of mind.

Details to include: Decisions regarding payment delays based on market conditions or how costs are incurred and profits are allocated—if one entity is experiencing profits while the others are experiencing losses, then it’s a red flag for audits.

Compliance Costs: Let’s face it—the wake of a pandemic isn’t the time to blow the budget on high-priced consultants who charge by the hour. Consider enlisting transfer-pricing software, like CrossBorder Solutions’ Fiona, to help pick up the pieces from 2020. Fiona takes the subjectivity and hassle out of traditional benchmarking searches and delivers a reliable, local set instantly. Plus, it’s a great way to keep track of the documentation regulations along with storing reports in real time.

Want to learn more about transfer pricing in the time of COVID? Listen to The Fiona Show podcast: Transfer Pricing in the Time of COVID-19.