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Impact of the COVID-19 pandemic on transfer pricing - OECD Guidance

Tomasz BEGER
Tax Partner at RSM Poland

The Organisation for Economic Co-operation and Development (hereinafter: OECD) has published the long-awaited Guidance on transfer pricing implications of the COVID-19 pandemic (hereinafter: Guidance). It includes comments and explanatory remarks that both taxpayers and tax administrations should take into account in evaluating the implementation of transfer pricing policies in the face of extraordinary economic conditions caused by the COVID-19 pandemic.

The OECD Guidance focuses on four areas:

  1. Comparability analysis;
  2. Allocation of losses and COVID-19 specific exceptional costs;
  3. Government assistance programmes;
  4. Advance pricing agreements (APA).

Below you will find a brief outline of the most important issues discussed in the Guidance.

Comparability analysis

The first and the most important issue addressed in the Guidance is the necessity to prepare comparability analyses for intra-group transactions in the absence of access to reliable and objective comparables taking the economic conditions brought about by the COVID-19 pandemic into account.

The Guidance points out that the reliability of historical data for preparing comparability analyses may be limited, in particular for the transactional net margin method. In the case where the price in a transaction between entities is being determined on a yearly basis, the preparation of a comparability analysis for FY2020 is recommended. According to the Guidance, loss-making comparables should not be automatically rejected, provided that these comparables satisfy comparability criteria. Indeed, when performing a comparability analysis for FY2020 it may be appropriate to include loss-making entities, provided that e.g. comparables assume a similar level of risk and were similarly impacted by the COVID-19 pandemic. For intra-group arrangements that assumed a fixed remuneration over a five-year period, there may be no need to update the comparability analysis if the material facts and circumstances specified for the controlled transaction have not changed.

Internal comparables and transactions the taxpayer concluded with unrelated parties can be particularly useful for performing a comparability analysis for FY2020, because this information is the most current and reflects the actual impact of the COVID-19 pandemic on the financial and economic situation of the entity.

Given the time lags between the occurrence of controlled transactions and the availability of information on transactions between independent parties, it is advisable to use reasonable business arguments describing the effect of the pandemic on the market environment. In line with the Guidance, if there is no access to comparables, taxpayers should rely on publicly available information about the impact of the pandemic on transactions between unrelated entities, including e.g. macroeconomic information, periodic financial statements (e.g. quarterly or monthly). What is more, comparing budgeted financial results with actual results may be helpful in assessing the impact of the COVID-19 pandemic on the taxpayer’s financial situation (e.g. lower revenues, higher costs, lower profitability). However, it is important to stress that it is the taxpayer’s responsibility to furnish evidence of the actual impact of the pandemic on their financial situation.

In addition, the price adjustment mechanism can be used between related entities by way of taking into account data available already after year-end and adjusting the price accordingly to comply with the arm’s length principle. The Guidance also indicates that it may be helpful to use more than one price verification method to confirm that the price in a controlled transaction is an arm’s length price, but this is not necessary.

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Allocation of losses and COVID-19 specific exceptional costs

The next issue discussed in the Guidance is the allocation of losses and COVID-19 specific costs. An analysis of the risks incurred by the parties to the transaction affects the way in which profits and losses affect the arm’s length transaction price. Exceptional one-off operating costs should be allocated by related entities the same way as independent entities would do.

It is not possible to establish a one general rule that “limited-risk” entities should or should not incur losses, because the functions performed, assets used and risks assumed by these entities vary. If an entity with limited risks and limited functions incurs losses, they must prove that the incurred loss results from a functional analysis and is closely related to the negative impact of the COVID-19 pandemic. Furthermore, in the case where it was only during the pandemic that a related entity started assuming risks they had not assumed before the pandemic, this should be re-examined in terms of new risk allocation and whether the assumption of this risk is not a result of business restructuring (change of the functional profile).

When performing a comparability analysis, it may be necessary to think how to allocate exceptional costs arising from the COVID-19 pandemic. In general, exceptional costs should be excluded from the net profit indicator, except when those costs relate to the controlled transaction as accurately delineated. Secondly, it should be considered whether the cost basis should include or exclude exceptional costs that are deemed to relate to controlled transactions. What is more, it should be decided if adjustments for accounting consistency will be necessary as exceptional costs may be accounted for either as operating or non-operating items. However, taxpayers are left with no answers as to how to reliably adjust accounting data related with the recognition of exceptional costs in practice.

Government assistance programmes

Many countries provided taxpayer support in the form of different assistance programmes aimed at reducing the negative impact of the COVID-19 pandemic. Therefore, the terms and conditions of granting this support should be considered when determining the terms of controlled transactions, because government assistance programmes may have a significant impact on transfer pricing. In particular, what must be considered is whether the receipt of government support provides a market advantage, along with the degree to which benefits of government assistance are passed on to independent customers or suppliers and the manner in which independent enterprises operating under similar circumstances would allocate such benefits between them.

Therefore, government support should be considered when selecting potential comparables. However, the question remains as to how, in practice, to make comparability adjustments enhancing the reliability of comparables possible, given different government assistance received as well as different accounting treatment of state aid affecting the analysed financial data.

Advance pricing agreements (APA)

The last issue addressed in the Guidance is the impact of the COVID-19 pandemic on advance pricing agreements. As a general rule, taxpayers and tax administrations should abide by and maintain agreements that have been concluded, unless a critical condition arises that leads to the APA being revoked or amended. Whether a breach of critical assumptions has occurred should be analysed on a case-by-case basis and must consider individual circumstances of both the taxpayer and market environment. According to the Guidance, if a breach of critical assumptions has occurred, the APA may be revised, cancelled or revoked.

Taxpayers should inform the tax administration of any material changes caused by the impact of the COVID-19 pandemic on their business as soon as possible; however, the tax administration may choose to wait some time until confirmed data and information about the effects of the COVID-19 pandemic on the taxpayer’s business are available.


The Guidance published by the OCED was supposed to provide taxpayers and tax administrations with explanatory comments and practical guidelines on the application of the arm’s length principle in controlled transactions in the unprecedented economic situation caused by the COVID-19 pandemic. Is it the case? On the one hand, the Guidance points to specific areas that require some special attention from taxpayers and an in-depth analysis of the impact of the COVID-19 pandemic on the taxpayer’s business and financial situation, and what follows: the impact on transactions with related entities. On the other hand, however, there are no factual, clear and straightforward guidelines on how to apply the recommendations included in the OECD Guidance, e.g. how to make comparability adjustments enhancing the comparability of comparability analyses, how to make comparables free from differences resulting from different accounting practices of recognising exceptional costs or related from government assistance programmes.

In conclusion, if anyone was hoping to find any ready-made solutions and answers on the impact of the COVID-19 pandemic on transfer pricing in this Guidance, they are certainly going to be disappointed. As the name itself suggests, guidance only includes certain guidelines and recommendations and not specific solutions.

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