Three steps to address transfer pricing during COVID-19

11/12/2020
Three steps to finding capital through transfer pricing

COVID-19 has had a significant impact on supply chains and continues to cause companies to make business decisions that they likely would not make under “normal” conditions.

Companies continue to struggle with managing suppliers and customer orders given ongoing economic uncertainty. Multinational companies should consider how the new reality of their supply chains will affect their transfer pricing results (including inadvertent changes to risk profiles) and evaluate whether modifications to transfer pricing policies can help improve cash flow and deploy cash where needed.

As companies assess the tax exposure associated with the impact of COVID-19 on intercompany transactions, they should consider whether transfer pricing can help their business uncover cash flow. We help companies address the risks and opportunities facing their intercompany supply chains as a result of COVID-19 and develop strategies for managing excess profit or losses and cash flow.

The key element of this process is for companies to understand the economics of the changing facts and circumstances within their supply chains. It is not only important to consider how these changes align with current transfer pricing policies but also whether proactive changes to intercompany pricing can achieve tax efficiencies and address cash flow needs. Operationally, this situation will require tax, accounting, and finance departments to collaborate with the company’s supply chain teams.

Transfer Pricing Assess

1. Assess how COVID-19 impacts the supply chain

The basic fact is that there likely will be a financial impact on businesses because of COVID-19. Each industry will feel the impact in different ways, for different lengths of time, and in different parts of the supply chain (and consequently throughout their global business). Companies with intercompany transactions need to understand where and how the supply chains have been interrupted and quantify the impact. To better assess the impact of the pandemic on their supply chains, companies should be asking:

  • Are suppliers facing production constraints?
  • Have orders been delayed or cancelled?
  • Are distributors depleting inventory?
  • Has research and development paused, and are new product offerings delayed?
  • Have customers increased or decreased demand?
  • Have suppliers or customers gone out of business?

With every answer, the next question inevitably seems to be: For how long? Knowing the answers to these questions not only will affect how intercompany transactions are evaluated, but they’ll also identify financial (cash flow) needs within the global organization. Companies need to assess adjustments to transfer pricing concurrently with cash flow deployment and the impact on effective tax rates. This analysis relies heavily on facts and circumstances, and COVID-19 likely changed the business operations dramatically. Companies need to assess how it has affected their business in order to react appropriately.

Transfer Pricing Estimate

2. Estimate and document

As companies develop an understanding of the impact of COVID-19 on their supply chains, they will need to gather the data that will measure the changes. Data can include budget versus actual/forecast analyses, workforce output, changes in supplier and customer terms and conditions, and other critical quantitative and qualitative measures to demonstrate the specific changes the business faces as it adapts to the current environment. Estimating the financial impact of COVID-19 will guide what information is necessary to document transfer pricing results and make supportable changes to generate and deploy cash flow where possible.

Discussions concerning cash flow should not be limited to capital contributions, dividends, and loans. Transfer pricing and customs and duties costs need to be considered as potential alternatives to redeploy cash flow, but these must be estimated, documented, and acted upon in a timely manner.

Transfer Pricing Evaluate

3. Evaluate and act

Before a company acts, it needs to evaluate how to execute modifications to existing transfer pricing policies. Things to consider include the reliability of available data and the accounting of extraordinary costs. Furthermore, companies need to interpret guidance in existing intercompany agreements and consider how the agreements might need to be changed. Companies also need to understand how working capital is affected in related- and third-party dealings. Finally, it is critical to understand the guidance provided by foreign governments on transfer pricing matters.

Keep up on the latest tax developments with Tax News Highlights.

Contact us

The Crowe transfer pricing and customs and trade groups can assist you in assessing, documenting, and acting upon the challenges facing your global supply chain because of COVID-19. Our teams not only advise on strategic tax planning and compliance matters but also work with clients to develop practical and supportable ways to deploy cash flow.
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Barry Freeman
Principal
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Danny McVeigh