Transfer Pricing and COVID-19 – Time to Re-Examine Your Policy
April 8, 2021
At a Glance
- Multinational Companies Beware: Economic impacts from COVID-19 may require a new transfer pricing policy to avoid future penalties.
- Impact on Your Business: Companies using profits-based transfer pricing methods will be affected the most.
- Next Steps: You need to take immediate action to determine if your current transfer pricing is defensible or if you need a new strategy. We’ve laid out some specific considerations below.
If your multinational company experienced a drop in profits or other negative effects from the pandemic, your transfer pricing methods might no longer be suitable. Aprio can help you create a new and improved strategy.
The full story:
If your company has multinational operations, then you know that global tax rates provide the opportunity to strategize your international presence to improve profits and minimize tax liability. However, multinational enterprises are also subject to transfer pricing guidelines, which carry strict compliance and reporting needs. These regulations can fluctuate dramatically around the world, creating complex variables you need to consider to avoid penalties or potential double taxation.
As if transfer pricing policy wasn’t already complicated enough, the pandemic created a volatile new environment with far-reaching economic impacts. The direct effect on the global supply chain and profitability will have very real implications for transfer pricing policy and results.
Some companies may be more affected than others
Companies using profits-based transfer pricing methods need to re-examine how they’re applying their methodology immediately, especially those that experienced a change in profits due to the pandemic. If your company uses the comparable profits method (CPM) in the U.S. or the transactional net margin method (TNMM) in OECD countries, you may no longer fall within these methods’ required range of profitability, potentially resulting in future penalties.
Avoiding penalties requires swift action
You need to act fast, but that can be challenging from the middle of an evolving crisis. To help multinational companies avoid transfer pricing headaches, we’ve identified three main scenarios to consider:
1. Evaluate expanding the number of years examined under the CPM or TNMM methods. For example, if you normally use a three-year average to compute the CPM or TNMM profit range, there may be economic justification to use a longer period, such as 5 or 10 years.
2. Assess the possibility of using a “loss-split” model instead. This could be a beneficial step if your multinational companies’ results fall into a loss position, but there are other facts and circumstances you must consider.
3. Consider the necessary adjustments to the benchmark companies. We use benchmark companies to document a company’s transfer pricing results, but those benchmarks lag by at least one year. Therefore, the benchmarks won’t accurately represent the economic environment in 2020 and beyond. Adjustments to the benchmark companies will help to create an appropriate arm’s-length range of profitability.
The bottom line
COVID-19 created unprecedented international supply chain challenges, leading to profit declines and resulting in ongoing implications on transfer pricing policy and results. Multinational companies need to take immediate action to re-examine current and future transfer pricing methods and documentation or risk penalties from the IRS and other tax authorities.
Adjusting your transfer pricing method is time-sensitive; the longer you wait, the fewer options you will have to make the necessary changes and prevent a transfer pricing controversy. Aprio’s international tax professionals can help create a strategy uniquely suited to your company’s needs.
COVID-19 has been hard enough on your company’s profits and supply chain already; don’t risk additional penalties due to the wrong transfer pricing methods. Contact our team today and start putting the pandemic behind you.
About the Author
Robert is an international tax partner with more than 27 years of experience providing international tax solutions to publicly and privately-held corporations on an array of international tax matters, such as foreign tax credit management and utilization, structuring foreign and domestic operations, international mergers and acquisitions, and export tax incentives. He also has many years of experience serving foreign-owned U.S. businesses.