On 18 December 2020, the Organization for Economic Co-operation and Development (OECD) published set of Guidance which provide clarification and support for taxpayers and for tax authorities when applying transfer pricing rules for periods affected by the COVID-19 pandemic.
This Guidance focuses mainly on these four issues:
- comparability analysis,
- losses and the allocation of COVID-19 specific costs,
- government assistance programmes,
- Advance Pricing Agreements.
Regarding the potential decline in profitability for related parties, there is a high risk that the tax authority will focus on examining the area of transfer pricing. In this context, the Guidance recommends keeping records of internal and external factors affecting business activity, such as demand fluctuations, sales development, volume of subsidies, supply chain functioning and others.
When preparing the transfer pricing documentation for the period affected by the pandemic, it is important to distinguish the extent to which the company is affected by the pandemic and the extent to which the change was due to other factors. Moreover, it is also important to distinguish which entity within the assessed relationship bears the risks of the impacts of the COVID-19 pandemic.
It is important to note that the Guidance do not provide new recommendations outside the current OECD Transfer Pricing Guidelines, but illustrates the practical application of the arm’s length principle to the unique situation elicited by the COVID-19 pandemic.
For more information please contact Lukas Pesna at lukas.pesna@tpa-group.cz