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Transfer Pricing in Times of COVID-19: The Transcript

Transfer Pricing in Times of COVID-19: The Transcript

Did you miss our webinar on transfer pricing in times of COVID-19?

If so, we've got news for you: The event's transcript is now available for your reading pleasure.

A huge thank you to Pride Partners International for co-organizing this event with us and its three members—Claire Sanga, Lefteris Androkli and Terence Wilhelm—for sharing their insight into how the transfer pricing world might change as a result of the ongoing pandemic.

Feel free to download the reader's version of this event below and make sure to share it with your network.


For now, here are some of the event's main highlights!

What are the main challenges posed by COVID-19 to the practice of transfer pricing?

Lefteris AndrokliLefteris Androkli: "One of the main challenges is the comparability of data. For 2020, most of the companies are affected negatively from the pandemic on profits and sales. Therefore, one of the transfer pricing methods that is used to apply the arm length's principle such as the TNM method is negatively affected from the comparability of data, meaning that if we use data of the previous years, it will not be comparable with the current situation."

Claire SangaClaire Sanga: "I think of it more in a practical way. This time next year, we'll be trying to support our clients on how they document and justify their transfer pricing position. They're probably looking at fewer sales, loss making positions, and so on. Right now one of the challenges is that we're going to have to document and defend these positions also taking into account their previous transfer pricing documentation. One of the things here is consistency and how we can set up our clients now so that they don't have a problem in 2020...What I mean here is, if we're documenting 2019 now and we're saying that they are a limited risk distributor, we probably want to change that conclusion because next year when we come to justify 2020 and their loss making, perhaps they're not limited risk. Perhaps they do have some risks that you want to be able to include and the documentation for setting them up for the future."

Terence WilhelmTerence Wilhelm: "I'd like to play the devil's advocate for a minute. Of course, there are many challenges but to some extent there are also opportunities for us practitioners. To some extent, all the transfer pricing theories, the concepts that we've been discussing for years and years, they now became live, they are for real. How to allocate losses, exactly as Claire just said, what does that mean or what does it entail to qualify an entity as a limited risk distributor or manufacturer versus the entrepreneur, things like this, the allocation of the residual profit or loss…Now we're confronted with these concepts and we need to find solutions, whereas in the past when the economy was running out basically, when things were quite okay, those concepts were not so important after all. So it's true that we need to reinvent, I think, lots of transfer pricing theories because now we are confronted with something global and harsh to deal with."

Might this pandemic increase the risk of double taxation and tax disputes between jurisdictions? How so?

Claire Sanga: "Yeah, definitely so. There definitely is opportunity for double taxation to arise; we already have it even without a pandemic to deal with. For example, I have a client at the moment, it's a very big client with a smaller subsidiary in Spain, it's under transfer pricing assessment in Spain, when we have transfer pricing adjustments, and they're too small for us to be able to instigate a mutual agreement procedure, then that's where we may be having double taxation."

Can national COVID-19 economic impact assessments be used to support positions?

Terence Wilhelm: "Definitely, I would say this is a robust argument to be used. One example that just pops up is that in France, this pandemic has been recognized as a force majeure cause. Basically, that means that even in intercompany transactions, we could pretend that this situation could not be expected, it is a force majeure, so that we will not apply the terms that are in the drafted intercompany transactions and notably the remuneration, for example. So based on that, we could pretend indeed that this year we will not implement the transfer pricing policy, we will not ensure that, for example, the French affiliate will derive a positive arm's length margin because now we have this force majeure cause applying so, yes, definitely, I would typically use that as an argument."

How will transfer pricing models be required to be adjusted following COVID-19?

Lefteris Androkli: "The transfer pricing models need to reflect market conditions. Therefore, each group needs to take immediate actions by gathering appropriate documentation of what has changed in the various countries that they operate, how the market conditions have changed and to apply these new conditions into intragroup arrangement and intragroup pricing. We need to have in mind always that the arm's length principle is what third parties will do in similar circumstances. Therefore, if we have a group that is negotiating a crisis with all of its suppliers, third party suppliers, then we expect this to happen between internal suppliers. Therefore, it needs to have documented what has applied with third parties in order to apply it with the related companies as well, and the documentation, as Claire said, needs to be collected now because if it is going to be collected one year later, going back when you're preparing or updating your transfer pricing policies, you might miss information that would be crucial in defending your position against tax authorities."

Happy reading!