Transfer pricing in the corona crisis Transfer pricing in the corona crisis

The coronavirus spread around the world at a pace and magnitude that nobody expected. Within a short timeframe societies in Europe and worldwide stood still – with dramatic impact on supply chains and companies.

Companies are still in crisis mode as they prioritize business continuity and employee protection, while also managing supply shortages and client demand. Such extraordinary situations bring companies to their limits. While the focus now is on minimizing the negative impacts, companies will have to deal with the tax and transfer pricing consequences of the crisis once things get back to normal. Companies are advised to consider those implications early to avoid further issues in the aftermath of the crisis and be better prepared going forward.

Swiss multinational companies should consider the following three aspects.

Many Swiss multinationals operate a principal structure-like transfer pricing operating model with a Swiss entrepreneurial entity and low risk distributors (LRDs) and contract manufacturers (CMs) worldwide. Those routine entities are expected to earn a small but stable profit margin, e.g. often an EBIT margin between 2% and 4% for LRDs or net profit mark-ups for CMs. However, this margin is commonly expected to be earned under normal business circumstances.

During the corona crisis, companies are far removed from normal business circumstances that could justify lower than usual profit margins or even a loss. Whether foreign tax authorities will fully agree to such argumentation immediately cannot be guaranteed, but discussions in this vein were already successful during the financial crisis a decade ago. Thus, it is important that the extraordinary business impact is quantified and documented and supports the argumentation towards tax authorities, e.g. deviations between initial budgets and actual figures per legal entity.

As a result of the crisis, subsidiaries may be in need of funds to pay salaries and ongoing expenses. Some may face difficulties in serving their obligations to pay interest on intercompany loans. In the latter case, delaying interest payments temporarily may be one option to strengthen the financial situation of a subsidiary. Any such measures should be well documented towards Swiss tax authorities.

In case short-term funding needs are managed via a cash-pool structure, the pricing of the funds may be subject to stricter scrutiny by tax authorities. Especially if certain group companies have contributed cash (before the crisis) to the cash pool that prove to be of more benefit during the crisis, tax authorities may claim a higher remuneration for having provided such excess cash as benefits should be shared among cash pool participants.

In general, companies are advised to rethink their intercompany financing and cash pool structures in light of the new OECD Guidance on Financial Transactions. But more importantly, an efficient cash management will improve the position of a company during the next crisis.

Above all the corona crisis has highlighted the importance that business processes are clearly defined and can be managed remotely in a – suddenly – virtual organization where employees have to work from home or the workforce is limited. From a transfer pricing perspective this means that intercompany prices and profitability of group companies are monitored and managed actively. This includes visibility through customized TP dashboards with automated data updates and allocation of tasks, responsibilities and deputy roles.

In normal times, operational transfer pricing with appropriate processes is a must for efficient day-to-day execution of transfer pricing policies and to fulfill increasing control requirements adequately. In times of crisis, a well-defined operational transfer pricing setup can help companies manage the crisis successfully, support business continuation and be prepared going forward.