Transfer Pricing and COVID

November 03 2020
United nations covid 19 response Q i OYTY8 M unsplash

The COVID 19 pandemic is having an unprecedented effect on the world’s economy, global trade and supply chains and is disrupting the way in which MNEs conduct their business. The operational and the financial impacts of the pandemic will be felt by MNEs for the foreseeable future.

The economic downturn and changes to how businesses operate will undoubtably create transfer pricing issues and all MNEs should consider how their transfer pricing policies will be and have already been affected. We have outlined below some of the issues to consider and the steps to take.


It is important to identify and assess how the business model has had to adapt and to what extent this has a transfer pricing consequence:

  • Liquidity and limitations on free cash flow may impact the ability of group companies to meet interest and capital repayment obligations on existing intra-group debt, requiring the renegotiation of terms and conditions
  • New third-party debt may necessitate financial guarantees and also lead to new intra-group financing arrangements which need to be on arm’s length terms
  • New transactions between group companies arising due to changes in supply chain flows which need to be priced
  • Exceptional costs incurred, which need to be appropriately (re)allocated
  • Business restructuring undertaken, potential movement of functions, assets and risks leading to “exit” charges


In addition to setting policies for new transactions, existing policies need to be updated to reflect the prevailing conditions:

  • New or amended pricing policies need to reflect not only the prevailing economic environment but also third-party behaviour, e.g. the market’s reduced appetite for highly leveraged debt will reduce the magnitude of intercompany debt that can be supported
  • The economic impact across industries varies but it is clear COVID 19 will materially affect profitability (either positively or negatively) of most MNEs. TP policies based on the Transaction Net Margin Method need to reflect the prevailing conditions and not historical data which is not comparable
  • In many cases IP valuations will be depressed. If you have been considering an IP transfer within the group, now could be an opportune time, at a more attractive valuation, particularly if there are also likely to be tax losses available to offset against some or all of the gain on disposal


In order to defend new and amended TP policies it is important to ensure that robust documentation is prepared contemporaneously. Particular importance should be paid to:

  • Most economic analyses are reliant on databases which capture historical agreements or financial information, therefore not reflecting the exceptional economic environment today. Comparability adjustments will need to be considered and justified as appropriate
  • Changes to the value chain, arising either as a result of business / supply chain reorganisations or macroeconomic effects which will lead to a material change in the profit attribution across the value chain
  • Rationale for losses in “routine entities” (if applicable)
  • Material business restructurings and exceptional transactions which are more likely to be the subject of future tax audit scrutiny
  • Ensuring intercompany agreements are in place for new transactions and old agreements have been updated to accurately reflect the new ways of working and terms and conditions

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