Transfer prices in times of COVID-19

During this global pandemic, companies should urgently review their existing transfer pricing models in order to reassess transfer pricing risks, take appropriate countermeasures in the short term and find efficient solutions for compliance.

The following issues require short-term action

1. Transfer pricing policies for so-called routine enterprises assumed to achieve low but stable margins

  • May or must routine margins be adjusted?
  • If so, to what extent? Is it conceivable to suffer losses through routine companies?
  • Difficulty: Delayed effects of the crisis based on commercial databases - econometric adjustments required
  • Can contracts with contract manufacturers be suspended or terminated at short notice (loss of business base due to a lack of demand?)

2. Is there a need for adjusting intra-group services?

  • Often these are remunerated within the framework of a cost-allocation system or bilaterally based on a cost-plus system known as "low value adding services" with a uniform cost mark-up rate of 5%. Is this appropriate under the given circumstances?

3. What effects can be expected on existing license agreements?

  • Sales-driven licenses vs. profit-driven licenses with basic amounts
  • Should license rates be adjusted?

4. Transfer of intangible assets and transfer of functions

  • How reliable are value determinations made  by applying the DCF valuation method under relatively stable forecast situations resulting in expected stable values?
  • What proactive steps should be taken in applying price adjustment clauses contractually agreed upon?
  • Are there any reasons for transferring hard-to-value intangible assets within the group at this time?

5. Securing liquidity

  • Cross-border cash pooling is an important management tool
  • Financial effects due to the group rating deteriorating - complete transfer within the group of companies?

6. Restructuring projects

  • Who bears the restructuring costs in a crisis?

7. Proactively providing evidence by documenting the motives for and the extent of  transfer pricing adjustments

  • Deviations from existing transfer pricing principles:
    • Distribution of functions and risks within the Group
    • Group-wide transfer pricing guidelines
    • Intercompany contracts
    • Reduced margins or sharing the loss of routine business

must be carefully documented as extraordinary business transactions in all cases

  • Strengthening the position of the taxpayer in the event of any subsequent tax audits. 

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