Gone are the days when a corporation used to limit its activity and operations to a country’s boundary. Businesses are global and see the world as part of the same supply chain. In such a situation, even if there is an issue in one part of the globe the factors of production and demand gets affected. Imagine the scale of disruption that a microorganism could bring when every major economy of the world is infested by such microorganism. Think of a company that has a procurement centre in Dubai, procures raw materials from Latin American countries, have production centres in India, with ultimate demand for the product in Europe and the USA. How would you as a business steer your global enterprise? Could you use transfer pricing as a tool to manage your profits effectively? Do you think your European business needs a type of restructuring in the current scenario? Let us find out top 5 transfer pricing considerations in light of COVID 19 pandemic.
- Review the global landscape: Global business supply may have cost centres as well as revenue centres. For example, a travel business could have a back-office service centre in India. Considering the slow down in travel industry the management may like to take a short term decision on reducing the percentage profitability of such cost centres (usual remuneration on a cost-plus basis), as the independent service centres in the uncontrolled scenario might book lesser profits thereby pulling the comparable range lower than the earlier years. In such a way global profitabilities could be reallocated to affected areas where the management may feel pressure thereby managing the profitability as well as a cash position. Incase management plans to set up certain structures during this period, a certain profit lower than the median could be considered as a probable arm’s length price/ margin.
- Review of the industry: While the global industry may show signs of slow down, certain specific industries like medical equipment industry (for eg- manufacturing of instant thermometer) could show a spike in its demand and profitability. It is essential to review the industry in this time in detail and document the industry perspective in the respective industry overview of the master file documentation to prove that the business performed in line with the industry and there is no specific transfer pricing reasoning for the variation in profitability. Such aspects could also form part of the annual reports of a company.
- Economic adjustments: For entrepreneurial entities, the impact of COVID 19 could be captured separately. For example non-absorption of fixed cost due to the suspension of production. Such a non-absorption could act as a fixed cost adjustment while undertaking transfer pricing analysis. Therefore, any abnormal costs incurred during the period to be treated as non-operational. In case the company is incurring working capital blockages, even working capital adjustments could be made in the transfer pricing documentation.
- Documentation: Transfer Pricing is all about documentation. Often multinationals miss on documentation of business realities or carry forward the past documentation ultimately to find itself answering difficult questions from the tax authorities. Considering a lapse in time between the actual transaction and the audit by the tax authorities, the factual conditions might also change and what could be held true today may not find right justification while thinking through three to four years later. The answer to the problem is real-time documentation. So whatever a business wants to document with regard to the impact of COVID 19 on its business, it is suggested to do it contemporaneously.
- Group Restructuring and new structures: For some MNCs, the troubled times could act as a right time to restructure a business while the global outlook is towards slow down. The idea could be to stop loss or maximise value by internal restructuring and placing the right elements in the right place in a supply chain and taking advantage of lower valuations. For example, if an MNC thinks of restructuring its full-fledged manufacturing to a simple contract manufacturing or shift the same to a country like India, such a decision could help from an economics point of view for the group at large.
While transfer pricing may not be on the top priority for many of the MNCs, that are grappling with the effect of COVID 19, a smart business could make use of transfer pricing principles to navigate the trouble times. Also, factual analysis and documentation could go a long way in mitigating any possible risk in future from a transfer pricing point of view, especially in the year where the probability of making super or normal profits is low.
“TransPrice is a tax firm focused on Indian and Global transfer pricing.”