The pandemic caused by COVID-19 has raised a number of practical problems in the area of transfer pricing documentation in relation to the application of the arm's length price principle. Dealing with the significant economic impact of the virus situation, such as cash-flow difficulties, closures, volatility in demand and profitability, supply chain disruptions, has become one of the most important issues for companies belonging to multinational groups.
Main transfer pricing issues
The OECD transfer pricing guideline provides guidance on how to deal with transfer pricing issues affecting some company groups in a health emergency. The following four major areas can be highlighted:
1. Comparative analyses
There is a time lag between the data in the databases and the economic impact of the pandemic, so comparability between the emergency and the period preceding it is an important issue.
2. Managing the costs, expenses and losses resulting from the virus situation
As regards the sharing of costs and expenses between group members with different functional profiles, the question is whether losses can be shared between group members.
3. Management of government support
Can costs covered by state aid be included in the company's cost base and how?
4. Advance pricing arrangements (APA)
The applicability of advance pricing arrangements and the scope of the APAs also extend to the period of emergency.
It is important to note that the guideline is not an extension of the OECD Guidelines! However, it does provide guidance for companies required to prepare transfer pricing documentation and TP experts in dealing with the most common problems that arise in the highly unstable economic environment resulting from the pandemic.
Does the pandemic constitute a force majeure from a TP perspective?
The OECD guideline pays particular attention to, inter alia, whether the existing economic situation caused by COVID-19 can be considered a force majeure. Hungarian legislation is rather strict on the issue of breach of contract. According to the Civil Code, the failure to perform the contract is the responsibility of the party obliged to provide the service or to perform the contract even if it is the result of force majeure. Under the law, if the following very strict conditions are met, the party in breach of contract (causing the damage) may be exempted from liability if:
- it proves that the breach of contract was caused by circumstances beyond its control,
- it proves that the breach of contract was caused by a circumstance unforeseeable at the time of the conclusion of the contract, and
- it proves that it could not reasonably be expected to avoid the damaging circumstance or to prevent the damage.
The OECD TP guideline emphasises that it is important to address such and similar economic situations in the contract between associated parties. It is therefore recommended that existing agreements are reviewed or possibly amended. According to the guideline, it is also possible that the economic situation caused by COVID-19 may even constitute a force majeure, taking into account the contractual provisions of the associated parties with each other as well as with independent third parties, and the situation should be assessed in the full context of the circumstances.
The OECD therefore does not and cannot give a precise prescription on how to deal with the effects of the pandemic from a transfer pricing perspective, as each company and company group is affected differently. Therefore, each company must examine and assess on an individual basis how the restrictions, changes in demand or market restructuring introduced to control the epidemic affect its transactions with associated companies.
One thing is for sure, the guideline states that the 2008-2009 economic crisis does not constitute a guide for preparing transfer pricing documentation or reviewing related transactions. We cannot draw any long-term conclusions from the financial data and industry averages of that time, as its structure, duration and impact on different industries vary significantly from those of today.
Transfer pricing, and thus transfer pricing documentation and transfer pricing records, are also a priority areas of investigation, with the tax authorities placing increasing emphasis on the content analysis of transfer pricing records.
Therefore, due to the upcoming deadline for corporate tax declarations, it is worth paying special attention and even seeking expert assistance to investigate the economic impact of the coronavirus epidemic on the company's administration, operations and associated parties. The preparation of transfer pricing records for 2020 may involve considerable analytical work due to the COVID-19 virus situation.
