COVID-19 has created a spell of disruptions and changes that have left practically no facet of business untouched. OECD also recently released guidance on how to manage the impact of the pandemic in order to correctly apply the arm's length principle in intra-group transactions. Since the ex-ante arm's analysis is time-sensitive, let’s hear from experts on the proposed solutions on the aforesaid framework and the upcoming challenges for taxpayers.

1. Transfer pricing
implications of the
COVID-19 pandemic
April 2021

2. Transfer pricing implications of the COVID-19 pandemic
© 2021 Deloitte Touche Tohmatsu India LLP. 2
OECD Guidance

3. Transfer pricing implications of the COVID-19 pandemic
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• Consensus document
• Application of existing guidance in applying the arm’s length principle under the circumstances introduced by the pandemic, not
an expansion or revision of the OECD TPG, with the objective of finding a reasonable estimate of an arm’s length outcome
• Four areas of focus:
− Comparability analysis
− Losses and the allocation of COVID-19 specific costs
− Government assistance programs
− APAs
• In general, emphasis on:
− Taxpayers contemporaneously documenting how, and to what extent, they have been impacted by the pandemic (a hazard risk)
− Reviewing allocation of risk among controlled parties based on an accurate delineation of the controlled transaction
− Reviewing circumstances of the market
− Contemporaneous documentation of COVID-19 impacts
− Transparency and communication for APAs
Summary of OECD Guidance OECD Guidance

4. Transfer pricing implications of the COVID-19 pandemic
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• Sales volume fluctuation
• Changes in capacity utilization
• Incremental or exceptional costs (entity and group-wide)
• Impact of government assistance
• How government interventions have affected pricing and performance
• Interim financial statements such as quarterly SEC filings or earnings releases
• Macroeconomic information e.g., country-specific GDP data or industry indicators from central banks, government agencies, industry or
trade associations
• Statistical methods such as regression or variance analysis
• Comparison of internal budget vs. actual sales, costs and profitability
• Effects on profitability or on third party behavior observed in previous recessionary periods or in current year, even if partial
• Use of reasonable commercial judgement supplemented by contemporaneous information
− Taxpayers should undertake reasonable and appropriate due diligence in evaluating the likely effects of the COVID-19
− Document best available market evidence currently available
• Use more than one method to corroborate the arm’s length price
• Loss-making comparables that satisfy the comparability criteria in a particular case should not be rejected on the sole basis of loss in 2020
Supporting the setting of arm’s length prices OECD Guidance
Prepare “but for”
analysis
documents

5. Transfer pricing implications of the COVID-19 pandemic
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Losses and the allocation of COVID-19 specific costs OECD Guidance
Can entities operating under limited risk arrangements incur losses?
It is not possible to establish a general rule to determine whether losses should be incurred
The functions performed, assets used, and risks assumed by ‘limited-risk’ entities vary
The risks assumed will be particularly important
Comparables must reflect the level of risks assumed by each of the parties to the transaction
Example:
A limited-risk distributor that assumes some marketplace risk may, at arm’s length, earn a loss if decline in demand means that the
value of sales does not cover the fixed local costs
It should not bear losses from the playing out of credit risk if it does not assume that risk

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Losses and the allocation of COVID-19 specific costs OECD Guidance
Careful consideration should be given to the commercial rationale for any change in the risks assumed by a company before and
after the outbreak of COVID-19
• Any new risk allocation must be supported by an analysis of all the facts
• Relevant evidence should be documented
Important to document support
for contract modification
The accurate delineation will determine whether any revision of intercompany agreements is consistent with the behaviours of
third parties in comparable circumstances:
• Independent parties may not hold each other to their contractual obligations
− E.g. if a third party distributor renegotiates payment terms on a temporary basis
• Consideration is needed of:
− Options realistically available
− The effect on the potential profit of the entities over the long term
• In the absence of clear evidence that independent parties would have made revisions, the modification of intercompany
arrangements is not consistent with the arm’s length principle

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• Determined by risk allocation
− If a cost directly relates to a particular risk, then the party assuming that risk would typically bear the costs
− The party initially incurring the cost may not be the party assuming risks associated to that cost at arm’s length, and consequently such
costs may need to be passed on to parties that do assume such risks.
• Some costs not viewed as exceptional or non-recurring
− Costs related to long-term or permanent changes (e.g., tele-working)
− Expenses that substitute other historical costs that are no longer incurred (e.g., rent, physical office expenses, travel) would likely be
treated as operating costs
− Such recurring costs (e.g., tele-working) incurred centrally can be charged out if they benefit other affiliates
• Industry considerations / behavior among third parties
− A manufacturer in a highly competitive market, with undifferentiated products, may be unable to pass on exceptional costs to its
customers without experiencing a decline in demand for its services (unless its competitors are passing on similar costs)
− A similar manufacturer that produces differentiated products in a comparatively uncompetitive industry may be able to pass on these
costs to its customers, at least partially, without experiencing a decline in demand
• Exceptional costs in comparability analyses
− Generally excluded at tested party and comparables except when the costs relate to the controlled transaction as accurately delineated
− For cost plus analyses, consider whether some costs should be marked up or passed through without markup
− Adjust for accounting consistency
Allocation of exceptional costs OECD Guidance

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Existing APAs
Advance Pricing Agreements (APAs)
Some businesses may now face challenges applying existing APAs under current conditions
Neither businesses nor tax authorities can automatically disregard or alter the terms of existing APAs
as a result of the change in economic circumstances
Existing APAs and their terms should be respected unless a breach of critical assumptions has
occurred
COVID-19 has led to material changes in economic conditions that were not anticipated when many
APAs were agreed
This will be analysed on a case-by-case basis taking into account the business’
circumstances, the commercial environment, and the duration of disruption
OECD Guidance

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