Transfer pricing and the pandemic recession: What to do about it

February 17, 2021

By Steven C. Wrappe, J.D., LL.M., and Marenglen Marku, Ph.D., The Tax Adviser

The COVID-19 pandemic has been globally devastating from both a personal and an economic standpoint. As of Jan. 5, more than 84 million people had been infected with the coronavirus, and more than 1.8 million people had died from the disease. Many multinational enterprises (MNEs) have suffered due to workforce issues, disrupted supply chains, and depressed demand caused by the pandemic. A lucky few industries, including digital services, biotech, and processed foods manufacturers, have achieved favorable outcomes based on specific higher demand. Nearly all businesses, even those that have fared better, are struggling to adapt to the post-pandemic business environment.

At the individual MNE level, the pandemic and the governmental interventions have forced sweeping changes in the allocation of functions, risks, and assets (tangibles and intangibles) among controlled parties and even produced material changes in the behavior of uncontrolled parties. Some of these changes were deliberate and intentional to address the impact of the pandemic (e.g., changes in functions and risks) while other allocations were simply the result of changes in demand and the resulting impact on profits (decreases or increases). In reaction to all of these material changes, MNEs will likely need to reevaluate their pre-pandemic transfer-pricing approach based on an updated application of the arm's-length principle and be prepared to defend changes in the transfer-pricing approach and results.

The pandemic and the pandemic recession
The pandemic has had a significant impact on the lives of people everywhere and on global business operations. Companies' global supply chains have been disrupted by plant closures, employee absences, and transportation issues. Contractual obligations of all types have been strained, violated, and renegotiated. Lowered sales and profitability have reduced the inherent value of intangibles and undermined risk allocations between parties to transactions. It should be noted that these pandemic-induced problems occur between both controlled and uncontrolled parties, as most businesses continue to adapt to the post-pandemic business environment.

Due to these fundamental changes to functions, risks, and assets, transfer prices need to be reevaluated and possibly altered to align again with supply chains and to recognize changes in value contributed by location. Entire transfer-pricing systems may need to be redesigned, given new sources of value creation and a cessation of some of the prior points of demand and supply.

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