Transfer Pricing and COVID-19 – Time to Re-Examine Your Policy|
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The negative economic impact of the COVID-19 pandemic will have current and future implications on your multinational company’s transfer pricing policy and results. How significant the impact will be is uncertain. Multinational enterprises (“MNEs”) will most likely face disruptions to their supply chains which will have a negative impact on profits.
Some of the more pressing transfer pricing issues that we have considered are:
- Companies that are using profits-based transfer pricing methods – comparable profits methods (“CPM”) in the U.S. and transactional net margin method (“TNMM”) in OECD countries – will need to re-examine the application of such methods to determine if their companies’ results still fall within the range of required profitability under the methods mentioned above.
- Consider expanding the number of years examined under the CPM or TNMM methods. For example, if the company normally uses a three-year average in computing the CPM (or TNMM) profit range, see if there is economic justification if using a longer period (e.g., 5 or 10 years).
- If the MNE’s worldwide results fall into a loss position, consider using a “loss-split” model if the facts and circumstances allow.
- Consider that the benchmark companies that we use to document an MNE’s transfer pricing results lag by at least one year, and as such, will not reflect the economic environment that we will experience in 2020 and possibly beyond 2020. As a result, adjustments to the benchmark companies will need to be made to create an appropriate arm’s-length range of profitability.
MNEs should now take immediate action to re-examine their current and future transfer pricing methods and documentation to ensure that they have defensible transfer methods and documentation. The longer the MNE waits, the fewer options it may have to make required changes. The IRS and other tax authorities have the authority to make significant tax adjustments and assess penalties if MNEs do not have sound transfer pricing polices and documentation.