Transfer Pricing Considerations in a COVID-19 World

Authors: Michael R. Pearson, Scott W. Simpson and Jack Millhouse

COVID-19 has presented a host of challenges for individuals and businesses on a global level. Congress and the IRS have attempted to mitigate the impacts of the pandemic by providing relief measures aimed to curb the economic distress of taxpayers. In addition to these efforts, FGMK recommends that clients examine their own businesses to see if they can make beneficial changes in the wake of COVID-19. One area that has repeatedly resurfaced is transfer pricing.

Transfer Pricing Review

For many organizations, transfer pricing policies were crafted during normal economic times. These policies are typically geared towards the allocation of income and profits, with the goal of maximizing tax efficiency with respect to the ultimate location of these profits. However, the COVID-19 pandemic has created large losses across a widespread breadth of industries. These losses have, in many instances, thwarted the original goals transfer pricing agreements sought to accomplish (i.e., losses are now being traced to low-tax jurisdictions).

In looking at existing transfer pricing agreements, there may be varying degrees of flexibility in amending them. Some arrangements include force majeure clauses which allow for termination/revision in cases of unforeseeable disasters (e.g., pandemic). Even absent such clauses, agreements may be drafted such that they can be amended by tweaking the economic functions, profit allocation or other essential terms to the agreement in light of the virus. In most tax jurisdictions, it is important to ensure the change is material so that the new agreement is respected by the local tax authorities. Certain jurisdictions may require an element of consideration to properly effectuate the change.

In making these changes, the concept of “arms-length” may be ambiguous in these turbulent economic times. Contemporaneous data associated with the pandemic may or may not exist to justify changes to the terms of agreement. That said, taxpayers can rely on Section 482 in the U.S. Internal Revenue Code, if necessary, to justify updated transfer pricing results to arrive at what taxpayers believe to be a fair “arms-length” value.

The economic slowdown associated with the pandemic presents a unique opportunity for organizations to revisit their transfer pricing agreements and ensure they are meeting their goals. FGMK is here to help.

If you have inquiries about this article or other international tax matters, please contact any member of the international team at FGMK.

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