Q&As

Coronavirus (COVID-19)—what is the potential impact on transfer pricing?

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Produced in partnership with Kapisha Vyas of Simmons & Simmons and Tomoko Ikawa of Simmons & Simmons
Published on LexisPSL on 03/04/2020

The following Tax Q&A produced in partnership with Kapisha Vyas of Simmons & Simmons and Tomoko Ikawa of Simmons & Simmons provides comprehensive and up to date legal information covering:

  • Coronavirus (COVID-19)—what is the potential impact on transfer pricing?
  • Intra-group contracts
  • Allocation of losses
  • Impact on rulings with tax authorities
  • New financing transactions
  • Impact on overall operating model

Coronavirus (COVID-19)—what is the potential impact on transfer pricing?

There are a range of issues that could arise for transfer pricing purposes, due to the impact of coronavirus (COVID-19).

Intra-group contracts

The starting point for a transfer pricing analysis will be the terms and conditions of a legal contract, and therefore clauses in intra-group contracts relating to termination or force majeure could be important in considering whether, and if so how, the coronavirus epidemic will impact arrangements between group entities. Third party contracts in similar circumstances may provide an arm’s length example of how intra-group arrangements may also be renegotiated in this current environment, whether that means changes to payment term durations, the related party fee itself or the need for compensation payments.

Allocation of losses

Given the broader financial impact that coronavirus has had and will continue to have, one of the key transfer pricing questions will be how this affects profit (or loss) allocation among group entities. The crisis will clearly result in a significant reduction in sales for some industries as well as an increase of other exceptional costs.

Local subsidiaries of multinational enterprises (MNEs) characterised as undertaking ‘routine’ functions for transfer pricing purposes (such as ‘limited risk distributors’, ‘contract manufacturers’, ‘contract R&D services providers’ and other routine service providers) in affected regions are often remunerated with a stable level of profit. Whether or not they should

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