The OECD issued its guidance on the COVID-19 pandemic and its transfer pricing implications. The document inter alia provides a multi-angle view on how loss-making entities should treat their losses. For taxpayers in the limited risk entity position, it is positive that the guidance refers to the approach of the OECD Guidelines, which state that: “simple or low risk functions in particular are not expected to generate losses for a long period of time”. The guidance therefore holds open the possibility that simple or low risk functions may incur losses in the short run. To support this position, the guidance suggests that a robust comparability analysis should be performed to accurately delineate the transaction and assess whether the loss may be assigned to a given party.
The OECD also emphasises that the allocation of COVID-19-related losses should be linked to the actual allocation of functions and risks from current commercial or financial relations. The analysis should include a review of the pre-COVID-19 and post-COVID-19 functional and risk profile.
With regard to the allocation of exceptional and nonrecurring operational costs, the OECD states that such costs should be excluded from the net profit indicator. It is suggested that the exclusion of such exceptional costs must be done consistently at the level of the tested party and comparables to ensure a reliable outcome, noting that the availability of this information may be limited. In this respect, the guidance notes that an analysis of whether the given costs are actually of an exceptional or nonrecurring nature should be made. For example, many enterprises have implemented teleworking arrangements as a result of COVID-19, but these arrangements may become permanent and thus should not be considered exceptional, but as costs of usual operations.
Lastly, the guidance also explores whether it may happen in certain situations arising from the COVID-19 pandemic that the impacts of the pandemic will be borne by all contracting parties based on force majeure clauses included in a contract on an intra-group transaction. It concludes that while this possibility exists, it cannot be automatically assumed that just because an intercompany contract contains a force majeure clause, the pandemic will provide sufficient grounds to invoke it. Again, proper analysis is recommended to support that independent parties would proceed in a similar manner under similar circumstances.
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