March 25, 2020

4 Transfer Pricing Implications from the Coronavirus

Transfer Pricing

The COVID-19 virus pandemic continues to evolve, causing substantial shifts in financial markets and the macro economy, which brings direct implications for multinational enterprises (MNEs). As governments enact new restrictions in an effort to protect public health, MNEs will most likely face disruptions to their supply chains and challenges related to moving personnel across borders.

Companies will continue to monitor and assess the impact of these measures to their bottom line. It may be wise to consider restructuring business models and supply chains to diversify procurement and manufacturing locations, developing new markets to diversify risk, disposing of assets, and integrating new acquisitions. At the same time, MNEs should be mindful that international tax reporting may also need to be adjusted to account for the disruption, particularly policies related to transfer pricing among related entities in different countries. The following provides a snapshot of some of the key transfer pricing considerations and trends related to the coronavirus disease 2019.

Supply Chain Reconfiguring

It may be necessary for a MNE to alter its transfer pricing arrangements and modify its supply chains due to significant disruptions in countries such as China. Some of these changes may lead to transfer pricing discrepancies, so it is wise to revisit your transfer pricing arrangements to ensure they align with your current supply chain. If there are significant differences between your supply chain and your documented arrangements, you may need to change your transfer pricing arrangements to reflect the re-allocation of functions, assets, and risks across the group.

Increased Oversight

Economic downtimes affect everyone. Companies may lose significant revenue, which often reduces what they would pay in domestic and international taxes. Governments affected by these reduced or lost tax revenues may turn to tax compliance enforcement to help make up the difference.  

As countries around the world begin their recovery efforts from the COVID-19 virus outbreak, MNEs’ transfer pricing arrangements may become a focus for governments. Transfer pricing audits will likely spike in tax years in which profit margins have been negatively impacted by the disruptions related to the COVID-19 virus.

MNEs should be mindful that enforcement efforts may increase in the coming years and be extra thorough in documenting their transfer pricing arrangements now. They should pay particular attention to the impact of the COVID-19 virus and any other extenuating factors on their arrangements in the event of a potential audit covering the COVID-19 virus tax years.

  • MNEs must be able to explain to tax authorities that their TP arrangements were valid during this period and note the unexpected deviations caused by the adverse factors beyond their control
  • It may also be necessary to model the impact of the COVID-19 virus on operating results and demonstrate that low profits or losses were not the result of non-arm’s length transfer pricing policies.

Local Government Stimulus Measures

Governments may also respond with a range of fiscal stimulus measures such as tax concessions, incentives, and rebates to help with the COVID-19 virus recovery efforts. For example, the Chinese government has already introduced some of these measures. Taxpayers should ensure they understand these stimulus and tax concessions globally and be assessing whether they are eligible. They should be considering the potential impact on their transfer pricing policies and intercompany structures in this context.

Budget Impacts

Taxpayers may face tighter budgets for transfer pricing compliance and support in the future, given other expenses related to the COVID-19 virus risk mitigation. The COVID-19 virus pandemic may leave MNEs with heavy tax burdens if not managed appropriately; therefore, it is advisable to be proactive and seek out streamlined, cost-effective solutions from a transfer pricing professional in order to effectively manage transfer pricing risks and compliance.

For More Information

For further discussion on the above or to learn more about how COVID-19 may impact your business, please reach out to Josh Finfrock, Transfer Pricing Managing Director at jfinfrock@cbiz.com.

2019 Individual Tax Planning Supplement

Copyright © 2020, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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