OECD’s COVID-19 transfer pricing guidance

| 2/4/2021
OECD’s COVID-19 transfer pricing guidance

The COVID-19 pandemic has had wide-ranging economic effects, causing supply chain disruptions, demand swings, business shutdowns, cash flow constraints, and increased losses (or profits in some cases) in the U.S. and around the world. In response, countries have provided unprecedented support to affected businesses in the form of subsidies, additional access to capital, relaxed regulations, and favorable tax changes. Together, these changes have led to practical challenges when applying the arm’s-length principle, an international tax and transfer pricing concept implemented by most countries that requires two related entities (such as a parent company and subsidiary) to price their intercompany transactions as if they were unrelated.

In response to the challenges of the pandemic, on Dec. 18, 2020, the Organisation for Economic Co-operation and Development (OECD) published its “Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic,” which focuses on four main pandemic-related issues:

  • Comparability analysis
  • Losses and allocation of COVID-19-specific costs
  • Government assistance programs
  • Advance pricing agreements (APAs)

The guidance provided by the OECD, which is for taxpayers and tax administrations, does not add to the OECD’s existing transfer pricing guidelines. Instead it provides a practical interpretation of the guidelines in light of COVID-19’s impact on the global economy and business operations.

Comparability analysis

Generally, a normal time lag exists between when companies set intercompany prices and when contemporaneous benchmarking data is available. To address this gap, companies often use historical data (such as profitability data of comparable companies from prior years) as a basis for their current year benchmarking. The economic changes brought on by the pandemic, however, mean that using historical data no longer might be a reliable approach.

In response to the potential unreliability of historical data, the OECD guidance provides several recommended approaches, including having separate pre- and post-pandemic testing periods. Another approach is to adopt mechanisms that allow for the adjustment of 2020 prices through adjusted invoices or intercompany payments in a later period (such as in 2021) when more accurate information becomes available. This approach might require tax return adjustments or amendments. The OECD guidance also notes that it might be appropriate to include loss-making companies in a comparable company set, assuming that they otherwise satisfy comparability criteria, though this approach might not be accepted by all tax authorities.

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Losses and allocation of COVID-19-specific costs

During the pandemic, many companies incurred losses for various reasons, including decreased demand and exceptional operating costs (such as personal protective equipment purchases). When considering these issues, the OECD guidance identifies three specific areas: 1) profit or loss allocation based on the allocation of risk between parties, 2) allocation of exceptional, nonrecurring costs related to the pandemic, and 3) the option to invoke force majeure clauses or otherwise revoke or revise intercompany agreements. Importantly, the OECD guidance addresses “limited-risk” entities that generally are assumed to have near-guaranteed profits each year but, due to the pandemic, might not experience the same profitability. According to the OECD guidance, these entities can incur operating losses, at least in the short run, based on specific facts and circumstances, such as the allocation of risks between parties. While the OECD guidance generally focuses on losses, it also notes that some companies have had increased profits during the pandemic, and in these instances, it is equally important that these profits are appropriately allocated.

Government assistance programs

Government assistance programs, such as subsidies, provide economic benefits to eligible companies and have supported businesses during the pandemic. These programs have potential transfer pricing implications. For example, a government wage subsidy provided to one company but not a group of otherwise comparable companies could affect profitability-based comparisons between that company and the group of comparable companies. Therefore, it is important to consider carefully the potential impact of governmental assistance programs on controlled transactions, on pricing, and potentially on comparable transactions or companies.

Advanced pricing agreements

When originally executed, most existing APAs did not consider the type of economic conditions caused by a global pandemic like the COVID-19 pandemic. According to the OECD’s guidance, however, the terms of existing APAs should be respected, absent the occurrence of a condition leading to the revision or cancellation of the APA (such as a breach of critical assumptions). The OECD encourages taxpayers and global tax administrators to work collaboratively and transparently to address these issues. Most notably, the OECD guidance recommends that a change in economic circumstances and business results should not be treated as automatic grounds to disregard or alter the terms of an existing APA.


The impact of the global COVID-19 pandemic has been severe and uncertainty persists, but companies’ intercompany transactions still have to be priced in a manner consistent with the arm’s-length principle. While the OECD’s guidance encourages pragmatic approaches and collaborative relationships between taxpayers and global tax administrators, it is likely that tax administrators will carefully examine changes in taxpayers’ profitability levels and scrutinize any pandemic-related changes to transfer pricing approaches or intercompany agreements. Therefore, it is more important than ever that companies carefully document and support their positions to demonstrate reasonable care to comply with the arm’s-length principle.

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Brent Felten
Brent Felten
Partner, Washington National Tax
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Sowmya Varadharajan