Multinationals must document transfer-pricing changes

Multinational enterprises (MNEs) should proactively evaluate their transfer-pricing arrangements in response to the COVID-19 pandemic and contemporaneously document any changes they make.

For global companies that end up in a loss position this year, “it really doesn’t look good” to unnecessarily pay taxes in foreign jurisdictions simply because of pre-existing transfer-pricing agreements, Brian Dill of Cherry Bekaert LLP said during his firm’s 25 June webinar.

Changes to transfer-pricing policies should be properly documented. Dill also highlighted that companies have not seen a business environment like this in many years. “It’s a big paradigm shift for all of us,” he said.

Dill and his colleague Kirk A. Hesser, of the same Virginia-headquartered firm in the US, suggested four actions that MNEs should consider taking quickly as part of their international tax planning:

• Examine intercompany agreements, focusing on whether they contain price-adjustment and/or force majeure clauses that allow changes to be made to transfer-pricing arrangements due to unforeseen events and, if necessary, make modifications to these agreements;
• Model impacts of COVID‐19 on global forecasts and cash needs;
• Make any adjustments to transfer-pricing policies as soon as possible and revise estimated tax payments; and
• Consider how to document 2020 now (do not wait until 2021 to do so).

The subject of transfer pricing concerns transactions between related companies across borders. Tax authorities vigilantly police these related-party transactions because they can be used to shift a multinational group’s profits from high-tax jurisdictions to low-tax jurisdictions, thus avoiding taxes.

Lessons of the last recession

One thing learned from the 2008 financial crisis, Hesser said, is that tax authorities examining changes to transfer-pricing arrangements “always want to look at your intercompany agreements”. During the coronavirus crisis, the first thing they are likely to check when an MNE seeks to support losses in limited-risk entities or suspend transfer-pricing policies is whether its intercompany agreements have price-adjustment clauses and/or force majeure clauses.

Many of these clauses specifically mention pandemics as a reason to depart from the agreement conditions or pricing. Tax authorities generally prefer when the clauses exist prior to the unexpected event. If these intercompany agreements do not already exist, they should be put in place now, Hesser said.

Documenting transfer-pricing adjustments in 2020 “is going to be unique”, Hesser said. The process of searching for comparables will be more complex now than in past years, and database time lag will especially be a problem. One approach would be to look at comparables during the last recession.

Hesser said tax authorities are generally more receptive to transfer-pricing adjustments if there is contemporaneous documentation, “which would mean, right now”.

Taxpayers expecting global losses to mean fewer transfer-pricing audits should think again. The last recession showed that audits are instead likely to become more frequent because government budgets will be extremely strained and transfer pricing is always targeted as a chief source of tax revenue, Hesser said.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the pandemic, visit FM’s coronavirus resources page.

— Dave Strausfeld, J.D., (David.Strausfeld@aicpa-cima.com) is an FM magazine senior editor.