The unprecedented changes in the economic environment following the outbreak of COVID-19 have created unique challenges for setting prices in intra-group transactions. The correct setting or verification of transfer prices for the past year while observing the arm’s length principle has become a hot topic. In this respect, identifying the actual effects of the pandemic on a company, and comparing and assessing them will be of key importance.
Comparability analyses are one of the key inputs for setting/verifying transfer prices. Yet, historical financial information on comparable transactions or companies (usually used in the preparation of comparability analyses) are less reliable for periods affected by the pandemic; and comparable financials for the year are usually only available in commercial databases in the second half of the following year.
The OECD’s guidance on the transfer pricing implications of the COVID-19 pandemic thus lists various sources of information that may be used to support the performance of a comparability analysis:
- analysis of sales structure and volume, compared to pre-COVID-19 years
- analysis of changes in capacity utilisation
- information on incremental costs as a result of the pandemic
- government restrictions or assistance programmes
- macroeconomic, statistical and other industry-specific information
- comparison of planned/budgeted data on sales, costs and profitability compared to actual results, and other.
According to the OECD’s guidance, taxpayers should document all currently available market evidence, or other relevant evidence of the pandemic’s economic impact, including its effects on the level of demand and on production and supply chains in the particular sector of the economy. Such information may be taken into account when preparing a comparability analysis for periods for which relevant comparables are not yet available.
When preparing comparability analyses for years affected by the COVID-19 pandemic, it has to be considered whether the comparable companies were facing similar conditions or governmental restrictions. Therefore, it is not recommend to simply draw an analogy to the previous 2008/2009 crisis, as market conditions were rather different then.
The last comment of the OECD guidance concerns loss-making comparables. Loss-making companies that in the specific case meet the comparability criteria should not be excluded from the analysis solely because they were loss-making in periods affected by the COVID-19 pandemic.
To mitigate the uncertainty caused by the COVID-19 pandemic, the OECD guidance suggests that tax administrators should allow for retroactive adjustments to transfer prices by issuing corrective tax documents once more exact information on comparable companies/transactions becomes available. Czech tax laws provide for this possibility through the submission of a supplementary tax return. However, in view of the possible materiality of the adjustments, companies should also analyse the implications for other taxes (e.g. VAT), customs duties, and, importantly, disclose the facts in their annual reports.
Thus, in these difficult times, taxpayers can only hope that the tax authorities will heed the OECD’s recommendations and approach these issues and any possible dispute resolution pragmatically, in particular where taxpayers in good faith make an effort to set prices at arm’s length while lacking essential information due to the COVID-19 pandemic.