COVID-19 - The Expected Transfer Pricing Impact

On March 11, the World Health Organization (WHO) announced the COVID-19 (also known as coronavirus) has become a pandemic. The worldwide virus outbreak is causing substantial shifts in financial markets and the macro economy, with direct implications for global supply chains and profitability. The impact will be exacerbated in the coming weeks and months, as governments have placed unprecedented restrictions on the movement of people as a measure to delay the spread of the virus.

While companies take stock of the impact of these measures on their bottom line, one likely outcome in the medium to long-term may be restructuring of business models and supply chains, to diversify procurement and manufacturing locations, develop new markets to diversify risk, dispose of assets and integrate new acquisitions.

From a transfer pricing perspective, the issues and trends to be aware of include:

• Affected companies will be required to explain low operating profits or losses to relevant tax authorities. In such cases, it may be necessary to model the impact of COVID-19 on operating results, in order to provide a robust defense during a future tax audit, and to be able to demonstrate that the low profits or losses were not the result of non-arm’s length transfer pricing policies.
• Transfer pricing models may need to be adjusted to be in line with any changes that are made to the supply chain, to ensure they reflect the re-allocation of functions, assets and risks across the group.
• Governments and tax authorities will place greater emphasis on transfer pricing, in order to fill the hole in national budgets caused by the anticipated economic slowdown. They may also respond with a range of fiscal stimulus measures including tax concessions, incentives and rebates. The Chinese government has already introduced some such measures. Taxpayers should ensure they understand these measures and consider whether they are eligible. They should also understand the potential impact on their transfer pricing policies and intercompany structures.
• Taxpayers may face tighter budgets for transfer pricing compliance and support in the future, given other expenses related to COVID-19 risk mitigation. Hence, they should seek out streamlined, cost-effective solutions to manage their transfer pricing risks and compliance.

For a discussion on the above and how COVID-19 may impact your business, please reach out to one of our team members or your local Kroll contact.