OECD Releases New TP Doc Guidelines for the COVID-19 Period
Economic conditions and the policy response from the government amid the Covid-19 pandemic created new challenges in transfer pricing practices, including the implementation of the arm's length principle (ALP). To respond to these challenges, the Organization for Economic Co-operation and Development (OECD) published a new guide entitled Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic.
OECD would like to assist taxpayers in preparing financial reports in the reporting period affected by the pandemic. This guide is also useful for tax authorities to evaluate the implementation of transfer pricing policies by taxpayers.
This guidance focuses on how the arm’s length principle and the OECD TPG apply to issues that may arise in the context of the COVID-19 pandemic. This guidance focuses on four priority issues:
(i) Comparability Analysis
The current guideline published by the OECD offers a pragmatic approach to addressing problems arising from the lack of comparative data availability.
In the aspect of comparability analysis, the OECD emphasizes that the availability of comparable data is an important aspect in implementing transfer pricing. The Covid-19 pandemic shows how few the comparable data is available. Therefore, in performing comparability analysis for FY 2020, it is important to consider any changes in the economically relevant characteristics, including the terms and conditions of the agreement, and whether unrelated parties would have tried to renegotiate those terms and conditions.
(ii) Losses and the Allocation of COVID-19 Specific Costs
During the COVID-19 pandemic, many MNE groups have incurred losses due to a decrease in demand, inability to obtain or supply products or services. When considering the issue of losses and the allocation of COVID-19 specific costs, there are three issues that need to be discussed.
First, it is important to emphasize that the allocation of risks between the parties affects how profits or losses resulting from the Arm's Length transaction. (Paragraph 1.58 of Chapter I of the OECD TPG)
Second, it will be necessary to consider how the outstanding non-recurring operating costs arising as a result of COVID-19 should be allocated between associated parties. The outstanding, non-recurring operating costs could be in the form of the expenditure on personal protective equipment, IT infrastructure system, reset office space to implement physical distancing requirements, or health-related safety equipment. According to OECD, the treatment of outstanding, non-recurring costs incurred as a result of the pandemic will be determined by an analysis of the risks assumed by the parties towards their intercompany transaction, an understanding of how independent enterprises may reflect such costs in arm’s length prices, and ultimately how such costs may impact prices charged in transactions between the associated enterprises (see OECD TPG paragraph 2.86).
Lastly, associated parties may consider whether they have the option to revoke or revise their intercompany agreements by also considering the current economic environment.
(iii) Government Assistance Programs
During the COVID-19 pandemic, governments’ biggest concern has been public health and the effort to control the spread of the virus while at the same time trying to help enterprises manage their declining business activity and workers who are facing a decline in employment opportunities or unemployment and also income.
The supports that the Government have provided to ensure enterprises can continue to operate through the period of reduction in business activity. Those supports include:
(i) loan guarantees;
(ii) direct financing to business on preferential terms;
(iii) loan deferrals;
(iv) specific grants and;
(v) tax relief
In this context, an analysis of the specific characteristics of government assistance would not be required in circumstances if the receipt of government assistance is unlikely to have a material impact on the transaction. (See section C of Chapter III of the OECD TPG).
(iv) Advance Pricing Agreements (APA)
COVID-19 has led to material changes to many potential future financial years and APAs that were agreed. Taxpayers and tax administrations who were negotiating APAs applying to Financial Year of 2020 may also face questions about how the economic conditions arising from COVID-19 should be taken into account.
Regarding APA, the OECD stated that APA still plays an important role in providing tax certainty to taxpayers and tax administrations by ensuring predictability in the treatment of international transactions for tax purposes, especially in the implementation of transfer pricing in the midst of a pandemic. The OECD also encourages taxpayers and tax authorities to collaborate in order to create an effective implementation of the APA program and be able to respond to the economic challenges caused by the Covid-19 pandemic.
The guide on transfer pricing published by the OECD this time focuses on 4 priority issues, namely comparability analysis, losses and cost allocation related to Covid-19, government assistance programs, and advance pricing agreement (APA).
In the aspect of comparability analysis, the OECD emphasizes that the availability of comparable data is an important aspect in implementing transfer pricing. The Covid-19 pandemic shows how little comparable data is available. Therefore, the current guideline published by the OECD offers a pragmatic approach to addressing problems arising from the lack of comparative data availability.
Regarding losses and cost allocation, the OECD noted that many businesses suffered losses amid the pandemic. Therefore, we need a guide regarding the allocation of losses and costs that are effective and able to minimize the potential for tax disputes.
In terms of providing assistance from the government, the OECD noted that assistance from the government such as stimulus has the potential to affect transfer prices. In this section, the OECD provides guidance on aspects that need to be evaluated in order to determine whether an incentive can have an impact on transfer prices.
Regarding APA, the OECD stated that APA still plays an important role in creating tax certainty, especially in the implementation of transfer pricing in the midst of a pandemic. Through this guide, the OECD encourages taxpayers and tax authorities to collaborate to create an effective implementation of the APA program and be able to respond to the economic challenges caused by the Covid-19 pandemic.