• Mischa Sollberger, Director |
  • Johannes Uhde, Senior Manager |

Disruptions caused by the COVID-19 pandemic and related Transfer Pricing issues may also have impacts on Advance Pricing Agreements (APA) and procedures. Taxpayers should carefully analyze the underlying critical assumptions and proactively address potential breaches.

The ongoing COVID-19 pandemic has had wide-ranging repercussions on the global economy. Many companies may be impacted directly in their value creation by business disruptions brought forward by the pandemic and public containment measures. At the same time, tax authorities are under pressure to raise tax income given gaps in public finance in the wake of business and social assistance programs. In the light of the ever-increasing focus of tax authorities on Transfer Pricing, multinational enterprises face significant challenges in applying the arm’s length principle under the current unique economic conditions created by the pandemic.

In December 2020, the OECD has released guidance on selected practical Transfer Pricing issues in the context of the COVID-19 pandemic. The guidance provides considerations on how the principles set out in the 2017 Transfer Pricing Guidelines should be applied in situations that taxpayers may face in the context of the pandemic.

Advance Pricing Agreements (APAs) and COVID impacts

Swiss multinationals are often defined by a globalized value chain with many cross-border intercompany transactions that are also significant in terms of transaction values. A strategic goal by the taxpayer may be to achieve tax certainty by means of APAs on the Transfer Pricing of significant intercompany transactions. Challenges brought forward by the pandemic may therefore also have direct implications on transactions under the terms of an APA.

How are negotiated APAs impacted?

The concluded APA typically stipulates critical assumptions which must be met by the taxpayer during the validity period of the APA. As per OECD guidance, the question whether the current COVID pandemic and the resulting change in economic conditions may lead to a breach in such critical assumptions should be analyzed on a case-by-case basis. A change in business results due to the pandemic would by itself not result in a breach of a critical assumption (unless the APA had a specific critical assumption regarding changes in business results).

If either the tax authority or the taxpayer concludes that the terms of the APA are no longer met as a result of the pandemic, and qualify this as a breach of critical assumptions, there could be the following consequences:

  • Revision: if taxpayer and authorities agree on how to revise the APA in response to the change in conditions noted as a critical assumption, the APA may be revised and applied under changed terms for the remainder of the period.

  • Cancellation or revocation: if there is a material breach in an APA’s critical assumption or the taxpayer is failing to comply with the terms set out by the APA, and if there is no agreement between taxpayer and tax authorities on how to revise the APA terms, the APA may be cancelled or even revoked. In the case of a cancellation, the APA would be in effect up to the cancellation date. In case of a complete revocation, the APA would be treated as it had never been concluded.

In order to proactively manage potential consequences, the OECD Guidance advises taxpayers to notify tax administrations on potential breaches of critical APA assumptions as early as possible after a change occurred or when there is awareness of a breach.

Further, taxpayers should carefully document any failure to meet critical APA assumptions, including a narrative explaining the anticipated effects of the pandemic on the transfer pricing methodology agreed within the APA.

How are ongoing APA procedures impacted?

The pandemic and resulting changes of economic circumstances may impact taxpayers in an ongoing APA procedure subject to negotiations.

Disruptions of negotiation schedules and replacement of physical negotiation meetings by remote meetings and telephone conferences may not only delay APA processes but also influence the negotiation process itself and the achievable negotiation results. For complex cases, a replacement of a physical negotiation round by a telephone conference certainly does not make it less challenging to come to a resolution acceptable to both competent authorities.

Further, changes in the economic conditions triggered by the pandemic in relation to the facts and circumstances set out by the taxpayer in its APA submission may lead to a need to adjust taxpayer positions filed with the competent authorities. Consequences may vary from a delay in negotiations as competent authorities reassess their positions to (in the worst case) cancellation of the APA procedure.
The OECD encourages all parties to adopt a flexible and collaborative approach in considering the following:

  • A split of the APA terms to account for specific time periods impacted by the pandemic disruptions on the one hand, and a separate set of APA terms valid in the long run under normal business circumstances;

  • Amendments to the APA terms retrospectively or by extension of the covered period;

  • Allow for the use of cumulative or term test methods.

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