Transfer pricing implications of COVID-19 - no easy fixes available

At the (virtual) 11th meeting of the OECD's Inclusive Framework on January 27 and 28, 2021, the global impact of the COVID-19 pandemic was discussed. OECD projections include a gradual walk to recovery that will take at least until 2022. Three major challenges to the world economy and for business in general were identified resulting from the pandemic: (i) unemployment and aggravated pressure from automation; (ii) (risk of) bankruptcies as corporate debt is close to the levels it had during the global financial crisis (of 2009); and (iii) the marked rise of public debt. In issue is when and how governments need to withdraw their stimulus programs.

So clearly, the impact of COVID-19 is worldwide and significant. It also impacts the transfer pricing practice of multinational enterprises ("MNEs"). As the world became more international, MNEs implemented global supply chains and centralized production and service functions in locations where people skills were high and costs proportionally low. However, border closings and lockdowns have dramatically frustrated and upended many of these supply chains. While independent enterprises will assess these developments and can act swiftly to reduce costs and reframe to cater to possible new opportunities, MNEs may find themselves caught in a tight net of corporate tax rules that govern the allocation of global income to the separate enterprises that make up the MNE: transfer pricing rules and regulations. Their global income allocation is determined by an analysis of functions performed, assets used and risks assumed. Changes to the characterization of the separate enterprises and to the previously determined income allocation are generally scrutinized, assumed to be exclusively for tax optimization purposes and often vigorously challenged by tax authorities.

Read the full article that was published in the March – April 2021 issue of the International Tax Journal here.