The COVID-19 transfer pricing adjustment

Without a doubt, the most relevant issue worldwide today is COVID-19, also known as CORONAVIRUS, and the confrontation between Saudi Arabia and Russia that has generated a drop in oil prices. The intention of this article is not to analyze the impacts that these are having on a social and economic level, there are already quite a few analysts reporting daily on the subject, and each country is generating (or not) possible contingency plans.

As you can see from the title, we will focus on the effect that the current situation may have concerning transfer pricing policies, as well as their documentation. In this sense, it's important to return to the basics mentioned in the OECD Transfer Pricing Guidelines referring to the elements of comparability, being that of economic circumstances (and I would add social/health ones too). To clarify the issue, it is important to divide it into two: regarding pricing policies in transactions that occur in business groups every day and transfer pricing (compliance) documentation.

Transfer pricing policies

To have more clarity in this regard, managers need to begin evaluating different aspects that include their transfer pricing policy, among which there are:

• Analyze how strong the impact is for the industry or industries in which the Group companies involved in intercompany transactions participate.
• What type of risks in each of the group companies taking? And if applicable, identify if there is any coverage contracted against these risks (i.e. exchange rate).
• The availability of group liquidity, and if necessary, centralize flows to have greater control over the use of resources.
• Issues in the supply chain, derived from policies related to border closures.
• Degree of inventory obsolescence and the impact of the low participation of the consumers in the market.
•  Internal plans of the group refer to specific needs that must be covered in the first instance for the sustainability of the company.

Thinking that business groups are going to carry out a business restructuring may be somewhat premature; however, it would be necessary to take into account what movements they are willing to make in the short term to lessen the impact of a recession.

Regardless of what the next steps are going to be, it will be important for the group to keep documentation of every decision it makes. This may include emails, internal budget analysis, contracts, minutes, among others, as well as valuable information they may have regarding the sector in which they participate. 

The above, what for? Let's remember that the day-to-day can lead us to attend to each issue spontaneously and many of the decisions we make today, tomorrow we could forget why they were taken. In a review and/or audit by the Tax Authority, this can be catastrophic. 

Documentation

Regarding the documentation for the transactions carried out during 2019, and for which it is common in Latin American countries that an informative statement must be presented regarding the results obtained from the analysis between March 31 and June 30, my recommendation to companies is to continue with the project as much as possible. It is common for there to be certain face-to-face meetings between client and advisor for the study, however, much of the information can be provided in digital form or video calls can be scheduled to attend to particularities of the case.

In some countries, extensions have been granted to present the income tax return, as well as informative returns, however, the vast majority have not acted in this regard, so, if you can gain time, the better. In our case, we use tools such as Zoom, Podio, Sharefile, Google Docs, and Loom, to stay actively connected and avoid delays in deliveries. It's important to make sure to avoid as many headaches as possible, once this difficult period has passed (which it will).

On the other hand, for the year 2020 documentation, as I already mentioned, due care must be taken to gather enough information to support decisions regarding the affected intercompany transactions. Furthermore, it's important to consider carrying out a preliminary analysis of transactions with a cut-off in the first semester of 2020, in order to identify the functions, assets, and risks assumed by each group company in their transactions. As well as companies or open market operations, which are used for comparability analysis.

Likewise, it's common that many of the analysis in which its customary to use financial information for three years (for that reason of the business cycles), they have to be reconsidered by the company and its advisor, in case this comes up with distorted results, according to what we see in the intercompany results.

 It is possible that the effects of what we are experiencing today will be more noticeable financially later on during the second or third quarter, and an early recovery will depend on the particularities of each industry, as well as on the agility of the decisions of each roup. Therefore, it will be necessary to carefully read the 10-K reports (or their counterparts) for each of the comparables that are used for our transfer pricing analyzes.

In conclusion, from each of our trenches, we can act, the course of the coming months will depend on us. Although the current priority is indeed health, we must not lose sight of the fact that current phenomena are generating a significant economic contraction, and panic may accentuate the latter. In such a way, use these days to rethink the way of doing business and do not lose sight of these issues, since we know that the audits will be around the corner, once all this is back to normal.

If you want more information, we invite you to visit our page and read our articles. If you need personalized attention, make sure to contact us, our experts are ready to help you. 

The opinions expressed in this article are the sole responsibility of the author and don't necessarily represent the opinion of Grupo Consultor EFE™.