Regulatory and Industry News Alerts from Armanino

OECD Releases Transfer Pricing Guidance for COVID-19

by Nghi Huynh
January 13, 2021

On December 18, 2020, the Organisation for Economic Cooperation and Development (OECD) released guidance on the transfer pricing implications of the COVID-19 pandemic. It is intended to provide mutually satisfactory solutions to tax administrations and multinational enterprises for transfer pricing issues resulting from the pandemic.

The guidance focuses on four priority issues: 1) comparability analysis; 2) allocation of losses and the allocation of COVID-19 specific costs; 3) government assistance programs; and 4) advance pricing arrangements (APAs).

Who It Applies To

The guidance applies to all multinational enterprises with inter-company arrangements.


The COVID-19 pandemic has created unprecedented unique disruptions to the global economy. Enterprises across a variety of industries are facing significant cash flow constraints as a result of the disruption to their supply chains. The economic conditions arising from the pandemic have led to practical challenges of application of the arm’s length principle.

Based on these concerns, the OECD has released this guidance to provide general principles for evaluating the arm’s length pricing determinations under COVID-19’s impact. The new guidance reflects the consensus view of the Inclusive Framework on BEPS, an OECD-led body comprised of 137 countries.


  1. Comparability analysis

    1. The pandemic may have a significant impact on pricing of transactions between unrelated parties, which may reduce reliance on historical data for comparability analyses. This may require taxpayers to consider a change in approach in performing comparability analyses. The guidance lists the different information that taxpayers may use in regard to comparability adjustments, generally by estimating the impact of the pandemic on the controlled transactions. The source of information includes an analysis of change in sales volume, capacity utilization, incremental or exception costs, identification of government assistance, comparison of financial projections vs. actual results, and other relevant macro-economic information.
    2. In general, the contemporaneous uncontrolled transactions are the most reliable information for comparability analysis. However, it may be challenging to use contemporaneous uncontrolled transactions, notably in the application of the transactional net margin method (TNMM) since the method needs historical information to set and test prices. FY20 information may not be available until mid-FY21 because of the lag in commercial databases. In these circumstances, the taxpayer will need to aggregate the result of FY20 with the results of the prior years to test the arm’s length nature of the transfer pricing policy applied in FY20. The guidance also provides the example of using a long-term arrangement covering FY19 through FY22.
    3. The guidance suggests that the taxpayers will need to perform a comparability analysis based on available prior year financial information and, depending on the facts and circumstances of the case, utilizing whatever current year information is available to support their transfer prices.
    4. The guidance notes that comparability analysis that is solely based on the global financial crisis of 2008/2009 should not be used, given that the COVID-19 pandemic and its impact are unique and unprecedented.
    5. Loss-making companies that satisfy the comparability criteria should not be rejected solely on the basis that the company is in loss-making during the periods affected by the pandemic. The loss-making independent companies may be valid benchmarks as long as the comparables are reliable (e.g., the comparables involve assumption of similar levels of risk and have been similarly impacted by the pandemic).
  2. Allocation of losses and COVID-19 specific costs

    1. During the pandemic, many enterprises have incurred losses due to its economic impact. When considering the issue of losses and allocation of COVID-19 specific costs, the guidance focuses on the following questions.
      1. Can entities operating under limited risk arrangements incur losses?
      2. Under what circumstances may arrangements be modified to address the consequences of COVID-19?
      3. How should operational or exceptional costs arising from COVID-19 be allocated between related parties?
      4. How should exceptional costs arising from COVID-19 be taken into account in a comparability analysis?
      5. How may force majeure affect the allocation of losses derived from the COVID-19 pandemic?
    2. An entity’s activity may be characterized as “limited-risk” because of its relatively lower level of functions and risks. But the guidance notes that the term “limited-risk” is not defined in the OECD Transfer Pricing Guidelines, therefore, there is no rule regarding whether the entity should or should not incur losses. The taxpayers should consider the specific facts and circumstances when considering whether the limited-risk entity can incur the losses at arm’s length.
      The guidance emphasizes the need to accurately delineate the transaction and the allocation of risks between the relevant parties. For example, a limited-risk distributor that assumes some marketplace risk as a result of the pandemic may earn a loss at arm’s length.
    3. Renegotiation of terms and conditions under existing intercompany agreements may be considered if it is consistent with the behavior of third parties operating under comparable circumstances. The examples in the guidance highlight the importance of determining whether or not the third parties would agree to revise their contractual obligations in response to COVID-19. In the absence of clear evidence that third parties in comparable circumstances would revise their existing behavior, the modification of intercompany agreements would be inconsistent with the arm’s length agreement.
    4. On the issue of allocating operating or exceptional cost between related parties, the guidance notes that it would need to follow the allocation of risk and how third parties would treat the costs. For example, if a cost directly relates to the particular risk, then the party assuming the risk would bear the cost associated with the risk.
      The guidance further distinguishes operating costs that may not be viewed as exceptional or non-recurring in circumstances if related to long-term or permanent changes to business operation. For example, certain cost in relation to employees working from home may become permanent if this practice becomes common as a result of the pandemic. If the cost is viewed as being neither an exception nor non-recurring, it should be considered a more common means of doing business when performing the comparability analysis.
      The guidance further elaborates that costs that are considered exceptional should generally be excluded from the net profit indicator, except when these are related to the controlled transactions. In determining whether to include or exclude the exceptional cost, the advice is to consider at arm’s length which party to the controlled transaction would have borne these additional costs.
    5. On the issue of a force majeure clause, which is defined as circumstances beyond the control of the parties to a transaction that can prevent the contractual performance, the guidance cautions against the use of the clause on the basis of COVID-19. Whether the pandemic constitutes a force majeure with regard to the intercompany agreement will depend on the analysis of the economic circumstances of the arrangement and whether third parties involved in the arrangement would decide to invoke a force majeure clause. The taxpayers would need to identity and document similar third-party behavior or events that are comparable to the related-party arrangement as part of evidence.
  3. Government assistance programs

    The guidance identifies the type of government assistance (e.g. wage subsidies, financing or loan guarantees) that would be economically relevant pertaining to how controlled transactions should be evaluated during the pandemic. The economic relevance of the receipt of government assistance will depend on whether it has direct or indirect economic benefit to taxpayers. Whether the economic relevance of the government support needs to be included into the pricing of controlled transactions depends on the nature of the assistance.
    It is unclear whether the economic benefit of the government assistance should be retained by the controlled taxpayer or should be passed on to the related party(ies) involved in the intercompany service arrangement, as the guidance is silent in this context. The factors that should be borne in mind while assessing the impact of the government assistance on the intercompany arrangement include the nature of assistance, functions performed and risks assumed by the parties involved in the controlled transaction, and the level of competition and demand within the relevant markets. The treatment of the government assistance primarily depends on how the economic benefit from the government assistance is shared between the parties.
  4. Advance pricing arrangements

    The guidance discusses how COVID-19 affects the APAs due to changes in economic conditions. It notes that the existing APAs should be maintained and upheld unless a condition leading to the cancellation or revision has occurred. Most APAs include critical assumptions about the operational and economic conditions that affect the transactions covered by the APA. Whether there has been a breach of critical assumptions should be analyzed on a case-by-case basis since the pandemic has not had the same impact on all enterprises. For example, it may depend on the duration of the disruption.

If you have any additional questions, contact our experts.

January 13, 2021

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Nghi Huynh - Partner, Tax - San Jose CA | Armanino
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