7 key considerations

The year of 2022 is coming to an end and has been eventful and challenging with the Ukraine-Russia conflict, continued supply chain disruptions and concerns over an impending recession, which have resulted in economic disruptions. 2023 is looking to follow the example with significant events, such as the expected implementation of Pillar 2 in several countries and the anticipated UK transfer pricing documentation rules from April 2023.

Due to all developments in recent time – and those anticipated for 2023, we have selected 7 key topics that should be taken into account for the year-end of 2022 and throughout the new year.

1. Year-end adjustments

The increased scrutiny on transfer pricing results, the ever-changing tax regulatory landscape (with BEPS 2.0), supply chain disruptions, and a potential recession (e.g., when taxpayers may want to better target specific parts of a range to keep cash in specific jurisdictions) highlight the importance of ensuring to make the necessary year-end adjustments.

For taxpayers that have made acquisitions during the year, it is critical that they understand the applicable transfer pricing policies, identify the needed financial data to apply the policy, and book the appropriate transactions (with the correct related parties and the correct transactions for purposes of VAT and duties). Taxpayers that are able to reflect year-end adjustments on their books for the year would avoid the necessity to make adjustments after the books are closed, and would likewise avoid the secondary adjustment consequences associated with those adjustments.

If taxpayers are struggling to make their year-end adjustments correctly or need to make large adjustments at year-end, they should be exploring operational transfer pricing (“OTP”) solutions. OTP refers to the implementation of transfer pricing policies to effectuate or account for them in an organisation’s financial statements. It includes gathering and wrangling data to apply the policies, setting transfer prices, and monitoring and calculating adjustments. 

2. Changing transfer pricing compliance requirements

2022 was the first year requiring the annual submission of transfer pricing documentation in Denmark. As part of the year-end process, it should be considered when this should be updated for the next financial year and plan accordingly.

Transfer pricing documentation requirements also continued to evolve this year outside of Denmark and it is important to assess the impact in achieving compliance for FY2022 and future years. Some examples include:

  • Hungary introduced a new transfer pricing disclosure form and a requirement for related parties to be registered after the first transaction within 15 days for fiscal years 2022 and beyond.
  • Cyprus implemented new transfer pricing documentation requirements to prepare Master File, Local File, and a table of summarised information for fiscal years 2022 and beyond.
  • Effective for 2022, Mexico introduced significant changes to transfer pricing documentation including a requirement to examine domestic intercompany transactions and a requirement to submit the Local File no later than 15 May 2023 (a shorter timeframe for taxpayers to prepare this document).
  • Brazil is in the process of fundamental changes to its transfer pricing rules to align them with OECD standards. For taxpayers operating in Brazil, this represents not only a change to be managed, but also an opportunity to simplify their transfer pricing operating models, documentation preparation, and even claim deductions for expenses that were previously disallowed. It is expected these new rules will be applicable beginning on 1 January 2024.

Looking ahead, one of the most expected developments will be the UK transfer pricing documentation rules that are anticipated to apply on or after April 2023. These rules will include a very distinct element: a summary audit trail in the form of a questionnaire detailing the main actions taken by taxpayers in preparing the Local File. 

3. Considerations from Russian market exit and Russian debt cancellation

The economic sanctions by Western nations on Russia in response to its invasion of Ukraine led many multinationals to exit the Russian market. These exits may give rise to losses if the stock of a Russian subsidiary becomes worthless. A deduction for worthlessness is generally only available in the year that the stock becomes wholly worthless, which generally requires a fixed and identifiable event establishing worthlessness in the tax year (or in certain cases, facts and circumstances indicating hopeless insolvency developed during the year). A taxable liquidation of an insolvent subsidiary may be an identifiable event that establishes worthlessness. Taxpayers with Russian operations should consider (1) whether they have an identifiable event for worthless stock deduction and the year to which it applies; (2) the amount of the deduction; and (3) whether the worthless stock deduction qualifies for an ordinary loss deduction, as opposed to a capital loss.

In addition, the unwinding of multinationals’ operations in Russia may also create cancellation of debt income for borrowers with loans from affiliated or third-party Russian companies. In case of full or partial forgiveness of debt, a borrower may be deemed to have taxable income to the extent that the adjusted issue price of the subject debt exceeds the amount transferred or deemed transferred in satisfaction of the debt. The opposite fact pattern may also occur,  lenders may be unable to fully or partially recover debt from Russian companies and may be able to claim a bad debt deduction.

4. Supply chain disruptions

Continuing supply chain disruptions and concerns about upcoming liquidity may prompt some taxpayers to revisit transfer pricing structures, including by modifying or terminating related-party agreements or,  in some cases,  restructuring their supply chains. These changes fall within the broad scope of restructurings addressed in Chapter IX of the OECD Guidelines, but Chapter IX is clear that the label “restructuring” does not in itself require remuneration. The arm’s-length standard is controlling in this area; and depending on the facts, it may be possible to modify arrangements without triggering a payment obligation. Regard must always be had for the terms of the existing contractual agreements.

If modifying intercompany agreements, taxpayers should consider whether the agreements address with sufficient detail how certain expenses are to be treated (operating vs. non-operating) and shared among the affiliates in line with their functional, asset, and risk profiles. For example, foreign exchange gains/losses, inventory write-offs, bad debts, and contract non-performance costs may become more prominent in a recessionary environment with a host of geopolitical risks.

5. Recessionary concerns

Because of potential recessionary concerns, taxpayers may want to consider mechanisms to transfer cash to specific jurisdictions, such as prepayments or intercompany lending. Intercompany lending may be attractive to some companies because of increasing interest rates.

Many taxpayers may want to consider reviewing their transfer pricing based on the potential economic downturn. For example, businesses expecting system-wide losses should consider where they expect to incur those losses and how they will support those positions. Tax administrations may be reluctant to accept losses, so taxpayers should be well-prepared to defend those positions with robust transfer pricing documentation to support any extraordinary results, , by reviewing their functional analysis and consider the impact of risks materialising (e.g., fluctuations in prices, inventory write-downs, foreign exchange risks). Taxpayers expecting system-wide losses may also want to revisit their structures and explore alternative structures better suited to the anticipated recessionary environment.

If a recession occurs, some taxpayers (consistent with, and necessitated by, changes in business operations) may want to take the opportunity to restructure their operations. A recession creates pressure for rationalisation, consolidation, and efficiency, often leading businesses to review their existing transfer pricing policies/results and, in many cases, to modify or restructure the operations which could lead to different contractual allocation of risk in the supply chain. At the same time, tax authorities may resist both changes in pricing policies and business restructurings that lower local profits, for example by imposing significant tax “exit charges” on the restructuring steps or re-characterise intercompany transactions to increase local profits.

6. Capital markets and rising interest rates

Although there was an initial slow-down in the M&A market in early 2022 (compared to 2021), activities are back to a healthy level despite high interest rates, with certain sectors like technology, media, and telecommunications dominating more than others. Given the transitional phase of the capital markets (increasing interest rates, LIBOR transition), taxpayers will want to consider various financial transactions in connection with year-end planning. Examples of financial transactions include the following.

Intercompany Lending

The Danish Tax Authorities continue to have an increased focus on the selection of interest rates for loans between related entities. Rising interest rates have further complicated this area because companies may have the option to reevaluate their current capital structures, including consider refinancing or arranging new intercompany loans. In that context, companies must consider pre-payment-options and covenants included in their intercompany loan agreements. For example, if the loan agreement is explicit about a make-whole clause, then the taxpayer will not have the burden of considering refinancing when rates are lower, while the absence of any early payment penalty provides flexibility for future planning. Any changes to a company’s capital structure should also consider debt capacity (i.e., debt versus equity), potential implication of the substantial modification rules and a company’s internal treasury department guidelines.

Cash Pooling Arrangements

Deposit rates and borrowing rates in cash pools in most situations historically have been set with reference to LIBOR. With LIBOR set to cease in June 2023 and with rising in credit spreads, companies would need to reevaluate their cash pool policies and ensure arm’s-length return to all participants, while not over-compensating the cash pool leader.


Factoring refers to the sale and purchase of accounts receivable invoices at a discount from face value. It is commonly used for financing working capital, companies sell their account receivables at a discount in exchange for cash. Rising interest rates means factoring can be a relatively more attractive option for short-term funding solutions as opposed to longer term loans or credit facilities and could allow for greater planning opportunities.


Companies could consider using financial guarantees given the increased interest rates. Additionally, performance guarantees provide additional planning opportunities, whether part of the supply chain or part of an indemnity to end-users or customers.

7. Monitoring BEPS 2.0

Many multinationals are closely monitoring developments as the OECD continues to move forward with BEPS 2.0. On Pillar 1, the OECD has held two consultations on Amount A (the reallocation of taxing rights over residual profits to market jurisdictions) and we are expecting a consultation draft on Amount B (the attempt to standardise baseline distribution and marketing returns) by the end of the year. There is uncertainty (and legitimate skepticism) about whether Pillar 1 will be implemented by 2024, the OECD’s current target. But the key message for taxpayers is that the work the OECD is doing is shaping the future of transfer pricing.

A few key countries have publicly stated they will implement Pillar 2 starting in 2024. So, groups with operations in low-taxed jurisdictions should be paying close attention. But it is not just your typical low-taxed group that should be concerned. Many multinationals are discovering they will be affected by some aspects of Pillar 2, either because of a counterintuitive scenario that pushes their effective tax rate below 15% in a given jurisdiction or simply the additional compliance burden that they will face.

Taxpayers should be mindful of the transition rule in the Pillar 2 model rules, which can be a trap for the unwary. The transition rule generally applies to transfers of assets, other than inventory, between related parties that occur after 30 November 2021, and the time when the relevant jurisdiction is brought within the scope of the global anti-base erosion (“GloBE”) rules. When it applies, the transition rule causes the asset to have a carryover basis for purposes of the GloBE rules, even if the transfer occurs in a taxable transaction that would create additional basis for local tax purposes. If the additional basis of the asset is depreciated or amortised for local tax purposes, but not GloBE purposes, this could expose the company to additional tax once the GloBE rules come into effect. 

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