Rethink - Transfer Pricing | Dealing with the transfer pricing complications arising due to COVID-19

Although there are glimmers of light at the end of the tunnel, there is no doubt that the COVID-19 pandemic has wreaked havoc on the world’s economy.  It has impacted the supply chains of many multinational enterprises (MNEs), the profitability of many industries and businesses, and the budgets of most governments.  As we reach the mid-point of 2021, the pandemic is still having a significant impact.  What can MNEs do to deal with the impact of the pandemic on the transfer pricing model and policies?  Let’s explore the actions that we recommend be taken in light of guidance issued by the OECD.

OECD Guidance on transfer pricing implications of the COVID-19 pandemic

On 18 December 2020, the Organization for Economic Cooperation and Development (OECD) released guidance for MNEs and tax administrations on the application of the arm’s length principle and the 2017 OECD transfer pricing guidelines (OECD TPG) to unique issues that may have arisen due to the pandemic. The guidance reflects the consensus view of the 137 members of the OECD Inclusive Framework on BEPS, addressing issues including:

  • Comparability analysis;
  • Losses and allocation of COVID-specific costs;
  • Government assistance programs; and,
  • Advance Pricing Agreements (“APA”s).

The guidance does not revise or expand the OECD TPG but is intended to clarify the application of the guidelines to fact patterns in the context of the COVID-19 pandemic. 

Based on this, we suggest that MNEs transfer pricing documentation will need to be expanded beyond the documentation for pre-pandemic years to clearly delineate the impact of the pandemic on their businesses, industries, and the comparables relied upon to be able to assert that transfer prices used in 2020 and 2021 adhere to the arm’s length principle in the OECD TPG.

Comparability analysis

The economic challenges brought about by the pandemic may have impacted the pricing of transactions between independent parties, and may result in deficiencies or the delayed availability of contemporaneous information on comparable uncontrolled transactions for purposes of pricing intercompany transactions.

The OECD guidance offers taxpayers and tax administrations three practical approaches to addressing information deficiencies, featuring the use of:

  1. reasonable commercial judgment supplemented by the best available information on comparable companies and transactions;
  2. the arm’s length outcome testing approach (which may allow for price adjustments based on information that becomes available in a later period); and,
  3. more than one transfer pricing method to corroborate a determined price. The guidance also confirms that the use of reliable loss-making comparables may be appropriate.

For most MNEs the analyses of comparables will, by necessity, need to be more detailed and in-depth than in previous years, requiring searching for information well beyond the usual databases and annual reports.  This holds true with respect to how comparables are treating pandemic-induced losses, COVID-19-related costs, and government assistance.

Losses and allocation of COVID-19 specific costs

Some MNE groups have incurred losses during the pandemic as a result of decreased demand, supply chain disruptions, or exceptional, nonrecurring costs specifically related to COVID-19.

The OECD offers taxpayers and tax administrations the following considerations when determining how best to deal with losses, or how to allocate COVID-specific costs:

  1. The allocation of risk is relevant for determining how losses incurred during the pandemic should be allocated between associated enterprises. A careful analysis of the relevant facts and circumstances and comparable uncontrolled transactions should be performed to determine whether allocation of losses to former “limited risk” entities is justified.
  2. Exceptional operating costs arising from the pandemic should be allocated based on an analysis of risks (which party assumes risks for these exceptional activities) and how the costs would be treated by third parties. When performing a comparability analysis, exceptional costs should be excluded from the net profit indicator for both the tested party and the comparable companies.
  3. Associated parties may seek to renegotiate their intercompany agreements and contractual obligations in response to the pandemic, and may consider whether unrelated parties would do so, or if a force majeure clause can be invoked.

In the absence of evidence that independent parties in comparable circumstances would have revised their agreements or commercial relationships, or would have exercised an option to apply a force majeure clause, the modification of arrangements between associated parties may not be consistent with the arm’s length principle.

Government assistance programs

To provide financial support to businesses and employees during the period of decreased business activity caused by the pandemic, many governments established programs including job retention programs and subsidies, financial and liquidity support such as loan guarantees, direct financing on preferential terms, loan deferrals, specific grants and tax relief to provide a direct or indirect economic benefit to eligible taxpayers.

The OECD offers taxpayers and tax administrations the following key considerations with regard to such programs:

  1. The availability, terms and duration of government assistance and the effect of the assistance on the controlled and comparable uncontrolled transactions should be analyzed when performing a comparability analysis. The guidance confirms that, under the OECD TPG, the receipt of government assistance does not change the allocation of risk in a controlled transaction.
  2. MNEs may face challenges in gathering information on the government assistance received by potential comparable companies.

The recommended best practice may be to try to limit the selection of comparables to those companies operating in the same political geography as the tested party. In practice, this may be easier said than done, as the pool of potential comparables can be quite limited in many jurisdictions.


The OECD guidance confirms that existing APAs are still applicable and valid during the pandemic period, unless a breach of the APA’s critical assumptions has occurred that would lead to the APA’s revision or cancellation (or revocation where fundamental terms have been breached). The OECD guidance clarifies that taxpayers and tax administrations may not automatically disregard or change the terms of existing APAs due to the economic changes brought about by the pandemic.

Depending on the specific facts and circumstances, the economic impact of the pandemic and the response of governments may qualify as a breach of an APA’s critical assumptions, thus allowing for the possible renegotiation of the APA. However, a mere change in business results due to COVID-19 during the affected period likely would not. The APA’s terms as well as domestic law and procedural provisions should be carefully considered in determining the impact of the pandemic on the APA.

The guidance encourages transparency and suggests taxpayers facing challenges in applying APAs due to issues caused by the pandemic raise their issues with the relevant tax administrations on a timely basis.  

How we can help

MNE groups will need to ensure that their allocations of losses and exceptional Covid-related costs during the pandemic period, as well as their intercompany arrangements and commercial relationships in general, reflect arm’s length conditions that include the effects of the pandemic. All relevant factual and economic analyses will need to be fully documented in the MNEs transfer pricing documentation.  As governments work to replenish their treasuries from pandemic-related outlays, we expect to see - and already are seeing - increased tax audit scrutiny on transfer pricing. Therefore, MNEs should carefully and contemporaneously document how and to what extent their transfer pricing has been impacted by the COVID-19 pandemic.

BDO can assist with the following:

  • Evaluation of the terms and conditions of existing intercompany arrangements and whether the arrangements should be modified;
  • Preparation of pandemic-specific transfer pricing documentation, including a robust economic analysis of comparables and how comparables allocated losses, dealt with exceptional costs, and handled government assistance;
  • Analysis of existing supply chains and entity characterizations; and,
  • Review of APAs to advise on steps to consider to address potential controversy matters.

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Transfer Pricing Technical Tax Leader, United States


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