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OECD guidance on the transfer pricing implications of the COVID-19 pandemic

The unique economic conditions arising from COVID-19 and government responses to it have resulted in challenges for the application of the arm’s length principle. To enhance tax certainty in the face of such challenges, the Organisation for Economic Co-operation and Development (“OECD”) released guidance (“Guidance”) on the application of the arm’s length principle in the context of the COVID-19 pandemic.

The Guidance emphasises that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 (“OECD TPG”) should continue to be relied upon when performing a transfer pricing analysis, including under the possibly unique circumstances introduced by the pandemic. Accordingly, the Guidance focuses on how the arm’s length principle and the OECD TPG apply to issues that may arise or be exacerbated in the context of COVID-19, rather than on developing specialised guidance beyond what is currently addressed in the OECD TPG. The Guidance represents the consensus view of the 137 members of the Inclusive Framework.

The Guidance focuses on four priority issues where the additional practical challenges posed by COVID-19 are considered most significant:

  • comparability analysis
  • losses and the allocation of COVID-19 specific costs
  • government assistance programs
  • advance pricing agreements (APAs).

The Guidance emphasises that while the four issues have been presented as discrete topics for ease of presentation, these topics may be interrelated and therefore need to be considered together and within the analytical framework of the OECD TPG. Within each of the four priority issues, the Guidance addresses several questions.

A common theme of the Guidance is that an appropriate arm’s length response to any issue will depend upon the facts and circumstances of the transaction under consideration, which is indeed a recommendation also valid for Czech taxpayers. The Guidance’s encouragement of pragmatism and flexibility provides a welcome practicality to addressing some challenging transfer pricing issues. It remains to be seen how different tax authorities will incorporate the suggestions in the Guidance into their dealings with taxpayers.