6 COVID-19- Related Transfer Pricing Documentation Considerations
April 14, 2021
By Henric Adey
Multinational enterprises (“MNE”) need to prepare robust transfer pricing documentation for the 2020 tax year (FY2020) to document and memorialize any changes to their transfer pricing arrangements or profitability related to the COVID-19 pandemic. Having this documentation in place is more important than ever as the pandemic changed the economic environment MNE’s operated in during 2020, impacting many facets of their business and, potentially, their transfer pricing.
Here are six key considerations to take into account when preparing this documentation
- Taxpayers are better equipped to avoid adjustments and penalties if they document their transfer pricing arrangements for FY2020 and address any extenuating market or business-related factors to memorialize them in the event of a future audit covering the COVID-19 tax years.
- Account for and clearly identify any government assistance when computing the tested-party results.
- Prepare contemporaneous work papers that analyze the variance between the pre-COVID-19 budget and actual results. This can provide further protection and can include further financial data analyses as evidence, such as:
- A detailed profit and loss analysis showing changes in revenue and expenses, with an explanation for variances resulting from COVID-19, including a variance analysis of budgeted (pre-COVID-19) versus actual results.
- Details of profitability adjusted to expected outcome if COVID-19 had not occurred. This analysis should consider all factors that have an impact on profit along with the associated evidence.
- Rationale and evidence for any increased allocation of costs or a reduction of sales resulting in the subsequent changes in operating margins to the taxpayer, taking into consideration the MNE’s functional and risk profile.
- Carefully evaluate benchmarking using comparable companies when it is rolled forward for FY2020. Consider adjustments or longer horizon data.
- Delineate the impact on intercompany transactions pre-pandemic versus post-pandemic. Any changes in the risk profile of the parties to the transactions may be considered a business restructuring.
- Explain the impact of the pandemic on the industry both globally and regionally in the industry analysis.
Due to the potential risk exposure involved, it is critical to document the aforementioned. For the most accurate and thorough analysis, consider the services of a transfer pricing expert.