This is to let you know that, on 18 December 2020, OECD published Guidance on the transfer pricing implications of the Covid-19 pandemic (“Guidance“), which represents the consensus view of the 137 OECD members (including Poland) regarding the application of the arm’s length principle in light of the COVID-19 pandemic.

The Guidance provides comments in relation to four issues: (i) comparability analysis, (ii) allocation of losses and specific costs related to the pandemic, (iii) government assistance programmes, and (iv) advance pricing agreements (APAs).

While the Guidance is designed to help taxpayers analyse the impact of the COVID-19 pandemic on their controlled transactions, the document makes it clear on many occasions that each case should be reviewed individually on its own merits.

Comparability analysis

  • Taxpayers should carefully analyse the impact of the COVID-19 pandemic on their businesses before attempting any transfer pricing changes, i.e. they should verify if the pandemic has affected their businesses and to what extent. It is unacceptable to assume that the outbreak necessitates transfer pricing changes in every case.
  • The effects of COVID-19 may make it necessary to update comparables. However, no update to the comparability analysis will be necessary despite the risks materialising as long as there is a pre-existing contract in force in which the price was agreed “in advance” for a few years.
  • Where the comparability analysis must be updated, taxpayers will face the issue of access to reliable information illustrating the impact of the pandemic on their industries or on comparable firms due to data access limitations which arise naturally from the timing of statutory reporting or publication of financial statements.
  • OECD recommends in such cases that the pandemic’s impact on prices of controlled transactions may be assessed by analysing variances between taxpayer’s 2020 budget and actual performance, changes in supply volumes or changes in capacity utilization, by doing industry analyses etc.
  • It may also be necessary to review comparables previously selected for the final sample to ensure that they continue to offer appropriate comparative value given the COVID-19 pandemic.
  • There are no reasons to exclude loss-making comparables if they continue to satisfy the comparability criteria, i.e. the companies assume comparable levels of risk and have been impacted by the pandemic similarly to the tested entity.
  • The Guidance also allows transfer prices to be verified against the arm’s length range and any resulting current-year adjustments to be made after relevant comparables become available, e.g. during 2021.

Allocation of losses and specific costs related to the COVID-19 pandemic

  • Any allocation of losses/costs specific to COVID-19 should follow the arm’s length principle. Any loss allocation should be based on a careful analysis of how functions, assets and risks were distributed between the parties before the pandemic outbreak. For example, a limited-risk entity (e.g. a limited-risk manufacturer or distributor) is not expected to generate losses for a long period of time if it did not incur any significant risks, such as the market risk, before the pandemic. But the Guidance holds open a possibility that short-term losses may be incurred by entities assuming some marketplace risks, if they have experienced a sharp decline in demand for their products due to COVID-19.
  • Cost allocations should be made in the same way as between unrelated entities. Generally, costs should be charged to the party which performs the functions or incurs the risks to which the costs relate.
  • Certain costs incurred during the pandemic in fact relate to the manner of doing business or its evolution, e.g. costs to implement video conferencing facilities would probably be incurred by related parties in the long run so they should be allocated onto the actual users.
  • An assessment should be made whether costs incurred in connection with the COVID-19 pandemic should be included in the cost base and whether any profit mark-up should be added on them.

Government assistance programmes

  • According to OECD, government assistance programmes launched in relation to the COVID-19 pandemic are market-specific and as such may affect controlled transactions as well as affecting the assessment of the reliability of comparables.
  • Taxpayers should thoroughly check: (i) if government support has impacted their controlled transactions, (ii) if the effect is significant, and (iii) how such support would be reflected in pricing between independent enterprises.
  • Even where the receipt of government assistance eliminates the adverse impact of the COVID-19 pandemic on a taxpayer, it does not mean a change in the risk profile of the controlled transaction and should not automatically trigger changes in pricing. Each pricing change should be based on a thorough analysis of the above-mentioned matters.
  • The most recommended way for a comparability analysis to properly take account of the use of government assistance programmes is to refer to local comparables that will best reflect the specific nature of that support in the specific country. It is also necessary to verify the accounting treatment of government support received by entities selected as the comparable sample.

Advance pricing agreements (APAs)

Existing APAs

  • The COVID-19 pandemic of itself is not a reason for existing APAs to lose their force. But it may lead to breach of critical APA assumptions.
  • OECD encourages taxpayers to take a transparent and collaborative approach by timely raising any possible breach of critical assumptions with the relevant tax administrations to seek optimal solutions as quickly as possible. The outcomes mentioned by OECD in this context include the following actions in relation to an APA: (i) revision, (ii) cancellation, (iii) revocation.
  • Taxpayers should not take deliberate action with a view to having their APAs revoked. They should proactively collaborate with the tax administration to maintain the APAs in force.

New APAs

  • OECD encourages tax administrations to take a proactive approach and allow new APA applications to be initiated in times of COVID-19. New APAs should be flexible enough to provide assurance to taxpayers both during and after the time of the pandemic.
  • OECD advises tax administrations to implement solutions enabling APA proceedings to continue during the pandemic, such as video conferencing, conference calls, electronic document sharing.

If this issue pertains to your business and you are interested in our assistance, please contact your WTS&SAJA consultant.

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