The Impact of COVID-19 on Transfer Pricing and Supply-Chain Planning.

AuthorSilbering-Meyer, Jessica

The COVID-19 pandemic has significantly disrupted business operations and financial markets. For companies that have reorganized operations to adapt to the evolving economic and business environment, existing transfer pricing policies may no longer apply with respect to corporate structure and intercompany cash flows. Some companies have moved parts of their supply chains as a result of the pandemic, making existing transfer pricing policies obsolete. Reduced profitability or disruptions to cash flows may affect an organization's ability to follow existing transfer pricing policies and compensate its legal entities appropriately. Companies might issue intercompany debt to help finance entities, but there is a risk that these payments may not satisfy the arm's-length standard. (1)

As a result of these and other changes arising from COVID-19, many businesses are implementing structural and transfer pricing changes, driven by shifting consumer demands (for example, moving to virtual models) and modifications to supply chains (for example, localization of manufacturing). Many global companies have gone out of business, requiring customers to seek other suppliers. Changing which related party is involved in the relationship may require a change in transfer pricing. Some companies are also determining which locations are responsible for functions such as manufacturing and sourcing and are rerouting their internal supply chains. Shifting the locations of functions may necessitate adjusting companies' transfer pricing positions to match the change in intercompany flows.

Changes to transfer pricing policies should be consistent with market behavior and be supported by appropriate documentation. Companies that update their transfer pricing policies should include in their standard annual transfer pricing documentation a detailed description of the reasons for change. The company must also ensure that third parties agree to any revisions to agreements. Finally, companies should review their updated functions and the risks and assets of all relevant legal entities, as well as intercompany agreements.

OECD Guidance

During the pandemic, companies have faced or continue to face significant cash flow restrictions. Depending on industry, businesses may have also experienced significant increases or decreases in profitability. Companies across various industries have faced disruptions to their supply chains, including limits on their operations and...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT