The OECD Publishes Its Long-Awaited Guidance on Transfer Pricing Implications of the COVID-19 Pandemic

On December 18, 2020, the Organisation for Economic Co-operation and Development (“OECD”) released its highly-anticipated guidance on transfer pricing implications resulting from the COVID-19 pandemic (“Guidance”).

The Guidance upholds the relevance of the arm’s length principle (“ALP”) as set forth in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 and reaffirms that the ALP is robust enough to deal with the economic conditions arising from the COVID-19 pandemic.  The Guidance provides the OECD’s observations and is not prescriptive and not binding on tax administrations. As such, the Guidance gives deference to domestic laws on the application of the ALP.

The Guidance covers the impact of the pandemic on comparability analyses, treatment of losses and allocation of specific costs arising from COVID-19 and advance pricing agreements (“APAs”). In addition, the Guidance advises that government assistance should be considered when analyzing the transfer pricing implications of the pandemic.

Below a short summary of some of the key observations:

• How the COVID-19 pandemic has impacted business (including commercial relationships with third parties), entity risk profiles, the value chain of the business and potentially transfer pricing policies should be documented contemporaneously.  Documentation should be taxpayer- and transaction- specific and adopt a practical approach.
• Benchmarking using comparable companies needs to be evaluated carefully as it is rolled forward for 2020.  Adjustments or longer horizon data are options to consider.
• The delineation of the impact on intercompany transaction pre-pandemic vs. post-pandemic is important. Any changes in the risk profile of the parties to the transaction may be considered a business restructuring under Chapter IX of the OECD Guidelines.
• Tax administrations are encouraged to work with taxpayers who have taken a proactive approach to document and assess the impact of the pandemic on their intercompany transactions, including the impact on existing APAs and ongoing APA negotiations.
• Heightened tax controversy and audit activity is to be expected during the recovery period post-pandemic, resulting in the need for robust and contemporaneously prepared audit defense files.