The tremendous potential to make a business run at a global level has broken the barrier. This has led to the adoption of a broad horizon in promoting the business worldwide. Therefore, it is clear that even if there is an issue in one part of the globe the factors of production and demand get affected. One can only imagine the impact which transfer pricing must have had during these global pandemic times. So let us find out the top 5 transfer pricing considerations in light of the COVID 19 pandemic.
- Review the global landscape: Global business supply may have cost centers as well as revenue centers. For instance, a business in the travel industry could have a back-office service center in India. Considering the slowdown, businesses such as these may have to take a short-term decision on reducing the percentage profitability of such cost centers (usual remuneration on a y in which the selling price is determined by adding a specific markup to a product’s unit cost.), as the independent service centers may not extract profit from the market in desired numbers thereby pulling the comparable range lower than the earlier years. In such a way global profitability could be reallocated to affected areas where the management may feel pressure thereby managing the profitability as well as a cash position. If there is an establishment of certain structures by the management, a certain profit lower than the median could be considered as a probable arm’s length price/ margin.
- Review of the industry: While the global industry may show signs of a slowdown, certain specific industries like the medical equipment industry (for eg- the manufacturing of instant thermometer) could show a spike in its demand and profitability. No wonder this is the pat time to undergo a review of the industry in detail and formulate the industry perspective in the respective industry overview of the master file documentation so it can be proved that the business has been performed in line with the industry and there is no specific transfer pricing reasoning for the variation in profitability. Such aspects could also account for the annual reports of a company.
- Economic adjustments: For entrepreneurial entities, the impact of COVID 19 could be captured separately. An example could be that of the non-absorption of fixed cost when the production is suspended. Such non-absorption could be a representation as a fixed cost adjustment at the time of undertaking transfer pricing analysis. Therefore, any abnormal costs incurred during the period to be treated as non-operational. Even working capital adjustments could be made in the transfer pricing documentation provided the company is incurring working capital blockages.
- Documentation: Transfer Pricing is all about documentation. Due to missing the documentation of business realities or carrying the past documentation forward, the management finds itself answering difficult questions from the tax authorities. Considering a lapse in time between the actual transaction and the audit by the tax authorities, the factual conditions are likely to change. That is to say that what could be held today may not have the same relevance or credibility three to four years down the line. The answer to the problem is real-time documentation. Hence, the documentation of the business regarding the COVID19 impact must be ideally done contemporaneously.
- Group Restructuring and new structures: For some MNCs, the troubled times could act as a right time to restructure a business while the global outlook is towards slow down. The idea can be to stop loss or build value by keeping the right element and internal restructuring in the right place in a supply chain and taking advantage of lower valuation. For example, if an MNC thinks of restructuring its full-fledged manufacturing to a simple contract manufacturing or shift the same to a country like India, the decision could pay off from the economic point of view.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
CA Ruchika Gupta
AKGVG & Associates