Covid-19 crisis : what consequences on transfer pricing ?

The Covid-19 pandemic has caused major changes in the economic activity of companies, and therefore in their transfer pricing policies. To date, questions remain numerous. The issue here is more about allocating losses within multinational corporate entities. The government aid, which has varied in amount between countries, makes this issue more complex.

Covid-19 will push companies to reorganize

Given the future economic impact of the pandemic, some multinationals will reorganize companies. These do not follow a legal or universally accepted definition. In the specific context of transfer pricing, these reorganizations include the cross-border redeployment of functions, assets and risks to which a potential for profit or loss can be attached. In the present case, it is more a question of distributing the losses between the legal entities. Generally speaking, in order to comply with the arm’s length principle, the tax authorities examine the distribution of risks between entities of the same group. Profits and losses are then allocated based on this risk allocation. To achieve that, a distinction is made between :

• The entrepreneur, which has the decision-making ability and benefits from the residual profit.
• The limited risk entity, which designates an entity bearing less risk in return for less decision-making abilities and lower compensation.

One important question lies in passing on the losses linked to Covid-19 to subsidiaries rather than to the parent company. Plausible reasoning consists in distributing all of the losses between subsidiaries in order to maintain its future supplies. However, this thesis will not be easy to defend in front of the tax authorities. Indeed, during a period of growth, the entrepreneur collects the residual profits. Therefore, it seems logical that in times of crisis, the entrepreneur bears the residual losses. In particular, countries will seek to prevent companies from transferring local government aids to other countries through transfer pricing policy.

The practical impacts of Covid-19 for businesses

The practical transfer pricing questions raised by the Covid-19 crisis relate to many aspects :

• Cash management : what are the tax consequences of the options available ? (cash pooling, intra-group financing, guarantees)
• The level of management fees to be invoiced to subsidiaries : should the amounts invoiced be reduced ? should they agree to write off debts to support subsidiaries in difficulty ?
• Government aid : should it remain within the beneficiary country, or should it be distributed among subsidiaries ?
• Supply chains : what impacts on the transfer pricing policy in the event of relocation of activities ?
• Intangible assets : how to adjust royalty amounts ?

Until the OECD gives clear guidance on the matter, companies will have to make operational choices and adapt their transfer pricing policies. Then they will have to defend them against the tax authorities, in a context of growing demand for fairer taxation (GAFA Tax, BEPS). Thus, countries could ask large companies to contribute more in order to deal with the Covid-19 crisis.