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Post-Covid Transfer Pricing Issues and How to Manage the Risks

By: Bianca and Mimi

            Since the start of the Covid 19 pandemic, it appears that many businesses have been impacted, causing global supply chain issues. Several changes have led to redefining business models, supply chain footprints, and intercompany transactions. It has now become more important than ever to assess entire value chains to determine how to make the best business decisions that will positively impact an organization. However, these adjustments have created transfer pricing risks where money does not align with the value creation of group companies. Consequently, redefining transfer pricing policies can become tricky as these can lead to an increase in disputes due to global tax reforms. 

            One factor that has impacted transfer pricing is global supply chain disruption and restructuring. When business models evolve, intercompany transactions tend to follow between group supply chains, which requires them to adapt a transfer pricing approach. This method allows for sales transactions between related entities of the same companies. At this stage in the pandemic, it is important to evaluate which whether group companies’ functional and risk profiles have changed to understand what kind of pricing adjustments must be made. For instance, limited risk distributors were previously risk-insulated, but since the pandemic hit, they have come to face many more business and transfer pricing risks. Current global supply chain delays due to pandemic related shutdowns and illnesses will pose additional risks to consider.

            A second important factor to consider regarding transfer pricing is the increased trend of working from anywhere. When the pandemic first began, many companies began to offer remote work options to keep workers safe. However, some have begun to see the efficiency that this model provides, making it a long-term option. While remote work does offer flexibility, it does have the potential to raise many tax and transfer pricing risks. Staff movement due to the pandemic have caused group companies to have inadequate substance to produce income recognition or creating a permanent work location for staff, which has negatively affected income and led them to pay taxes in multiple countries.

            Another factor that must be considered is increased transparency through global reporting, increasing the risk for disputes. With global tax rules continuously changing, restructured supply chains and a new workforce dynamic will likely lead to increased transfer pricing risks. Transparency has increased for companies has increased as many have faced multilateral audits while governments strive to raise income as pandemic restrictions begin to ease. With detailed requirements increasing within these audits, companies are feeling the pressure to demonstrate the compliance of their transfer pricing position.

            The Covid 19 pandemic has had both short- and long-term implications for companies and transfer pricing policies. Since business models, supply chain structures, and intercompany transactions have seen a wide range of changes, companies must be ready to adapt their transfer pricing approaches. 

Source:

Schwarzl, C. (2022, May 3). Post-covid transfer pricing issues and how to manage the risks. Bloomberg Tax. Retrieved May 13, 2022, from https://news.bloombergtax.com/daily-tax-report-international/post-covid-transfer-pricing-issues-and-how-to-manage-the-risks 

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