Covid-19 forced companies around the world to review strategies and operations quickly.
On 18 December 2020 The Organisation for Economic Cooperation and Development (OECD) has published impact guidelines Covid-19 for transfer prices. The guidelines focus on the practical application of the market price principle in four Key areas:
- • comparability analysis
- • loss and allocation of specific costs Covid-19
- • Government aid schemes
- • prior price agreement (APA)
The main objective of the Guidelines is to provide the officials and taxpayers with a single legal basis in which they can shape their transfer pricing policy.
The OECD recommends that related parties review and update their transfer pricing policy in the following areas to ensure that they are adequate to the current economic situation:
- • the risks to be taken by each party in the performance of their respective functions;
- • all transfer pricing policies, contractual terms and the development of any new policies or business restructuring
- • exceptional and one-off expenditure incurred in particular in connection with the pandemic Covid-19; e.g. HR, marketing and IT, as well as assessment of experience among companies of comparable size and activity
- • assets used and fixed costs
The review should contain documents supporting the analysis. The OECD Guidelines also highlight the importance of documenting the financial consequences of a pandemic in particular, by analysing the risk of each entity in a multinational group.
Consider now two Examples of possible impacts COVID-19 for inter-company transactions in Spain and Mexico.
Spain: Company A is a Spanish entity that imports and distributes wholesale beer and other beverages for hotel customers. Company A buys its products from company B, a related entity in Belgium. Company A negotiated with its clients 45-the day-to-day payment terms, identical to the conditions it has with Company B.
When the pandemic broke out, the hotel industry was closed and customers were unable to keep 45-the day-to-day payment conditions. This in turn caused cash flow problems for Company A, preventing its payment to Company B.
The review of the functions and risks undertaken by Company A and Company B throughout the group showed that Company A is a limited risk distributor, taking the main credit risk and market risk for its operations in Spain.
Company B was able to extend payment deadlines to 75 days, facilitating the cash flow of A while waiting for payments from its customers. Importantly, this extension allowed Company A to avoid seeking external financing to cover its liabilities and to eliminate the tax risk of interest deduction.
Company A signed an amendment to its distribution agreement with Company B, modifying it temporarily, in accordance with section 44 OECD guidelines.
Mexico: automotive industry is one the most important in Mexico. It turned out to be particularly sensitive to the pandemic when activity year to year decreased by 64% In the second quarter 2020.
The automotive sector includes sales and after-sales services; at the production level, it takes limited risks, while associated entities deal with end customers. The manufacturer provides the product and other specific services to a related network in Mexico.
The collapse of the automotive market has clearly created problems with intra-company payments for supplies and services. Given factors such as historical results, production and sales rates and exchange rates, the automotive industry was able to renegotiate payments and offer discounts.
These measures were in line with the OECD guidelines as they were taken in relation to the pandemic.
COVID-19 has affected business activities in all areas of which one the specific area is inter-company payments. The OECD Guidelines provide desirable assistance in this area but do not replace professional advice.
About Authors
Jacobo Garcia-Nieto Barcelona, Spain
Jacobo joined GNL Russell Bedford Auditors in 2016 as a senior manager with a particular focus on transfer pricing. He has extensive experience in providing transfer pricing consultancy services in valuations, financial transactions, corporate restructuring and service transactions. Jgarcianieto@GNLRUSSELLBEDFORD.ES
Xochitl Contreras Olvera Puebla, Mexico
Xochitl is a partner in business consulting and transfer pricing in Russell Bedford Puebla. He is a leading expert in transfer pricing and business advice, including the preparation of transfer pricing documentation, company valuations and intangible assets as well as cross-border transactions. XCONTRERAS@RUSSELLBEDFORD.MX Sindy
Hernandez Santiago Puebla, Mexico
Sindy is a transfer pricing and economic consultancy manager in Russell Bedford Puebla. She has completed an economics degree in finance. She worked in the area of transfer and eco prices