Multi-National Corporations around the world are revisiting financial projects for the rest of 2020. Consequently, many companies are now revisiting related party pricing agreements that have long stood in place.

However, any adjustments made to a transfer pricing must be done with caution as they are bound to attract the attention of valuation regulators in any part of the world.

Let’s look at a few important points of consideration that any company reviewing its arm’s length pricing mechanisms should think about before making any changes to the same.

  1. A change to fixed mark-ups between related parties should be driven by liability allocation decisions to account for increasing supply chain costs and/or decreasing revenues. The reasons for change should be articulated in existing transfer pricing documentation. As market studies may be hard to come by, companies can rely on economic indicators and statistics published by reliable sources such as government authorities, economic boards, chambers of commerce and/or industrial groups.
  2. Any changes must align to existing transfer pricing documentation that may already define the response to force majeure situations.
  3. Any changes must also align to existing agreements that determine where the greatest and least economic risk should be placed.
  4. Any changes made should be treated as temporary as the Covid-19 lockdown situation eases. The specific conditions in which the transfer pricing arrangements will return to status quo should be documented.
  5. If any assumptions were made in original TP studies and documentation, these should be reassessed for validity. If previously made assumptions no longer hold true and need to be adjusted, the reasons for the same should be clearly articulated.
  6. If TP documentation was submitted to authorities, companies should reach out to Tax and Customs authorities to seek at least a soft approval on changes that they intend to make.
  7. Any and all government support or bailout funds should be considered. In many cases, these cannot be transferred to overseas subsidiaries. Hence, care should be taken when issuing credit or debit notes after receiving any form of substantial government aid.
  8. Any revision to the TP agreements should also taken into account that the situation may get worse and the planned response should be documented.

If necessary, corporations can consult tax specialists to prepare a 3rd party unbiased assessment of the planned pricing changes. Lastly, companies that have long been intending to change transfer pricing arrangements should not attempt to use Covid-19 as an excuse to make permanent un-defendable changes to price points. As the movement of cargo has generally slowed down around the world, it must be assumed that tax authorities will aggressively audit companies in the coming years to recoup lost revenue, so any or all changes made should have a well articulated justification that is documented, regardless of whether the adjustment is short or long term.

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