The COVID-19 pandemic had an unprecedented impact on our everyday life: it imposed movement restrictions, brought social distancing measures, put unparalleled strain on the healthcare system and gravely wounded the global economy.

Monika Palmowska, Partner, Transfer Pricing

The majority of businesses had to adapt to the new reality, e.g. by introducing remote work, developing e-commerce practices, incurring the costs of implementation of new safety and hygiene measures, accepting limitations on certain industries' operations and acting in line with other extraordinary regulations. 

On the other hand, many distressed companies can now apply for State aid and government support at an unprecedented scale. The main goal behind the support measures is to protect workplaces and improve business liquidity. In fact, there are many indications that not only 2020, but probably 2021, will be marked by the fight against the coronavirus pandemic and efforts to revive the impacted economy. 

The impact of the COVID-19 pandemic

Thus, unprecedented in its global reach, the COVID-19 pandemic has created exceptional challenges for the economy around the world. Given the circumstances at hand, acting in line with the core rule of transfer pricing, i.e. the arm's length principle, becomes a challenge, both for taxpayers and tax authorities. In most cases, the correctness of settlements and the application of the principle will be assessed by the tax authorities with a certain delay, while taxpayers belonging to international capital groups have to make their settlements for 2020, considering the impact of the pandemic, as soon as possible. Undoubtedly, both parties are faced with uncertainty as to the application of the rules, which in the long term may significantly increase the risk of double taxation and, consequently, the risk of disputes.

In many countries, however, the aid came in a form of locally applicable guidelines. Nevertheless, due to the international character of transfer pricing practices, the OECD Guidelines on the application of the arm's length principle during the COVID-19 pandemic have been eagerly awaited.

The Polish Ministry of Finance announced that the issue of explanatory notes to transfer pricing applications would be tackled by the Transfer Pricing Forum, but made a reservation that any work on the notes must follow OECD giving its opinion in this regard, for the sake of consistency.1

The OECD's COVID-19 Guidance

The Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic (hereinafter: COVID-19 Guidance), published by OECD on 18 December 2020, was elaborated with lightning speed, for a document requiring coordinated actions and approval of the OECD's 137 member countries.

The COVID-19 Guidance gives useful hints amid COVID-19 turmoil but should be analysed and interpreted in conjunction with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. It must be noted that the COVID-19 Guidance does not contain separate and independent recommendations.

The focus of the Guidance is on four areas, which, according to the OECD, have the most significant practical implications, i.e.:

  1. Comparability analysis
  2. Losses and allocation of COVID-19 specific costs
  3. Government assistance programmes
  4. Advance pricing arrangements (APA)

It must be kept in mind, however, that the COVID-19 Guidance does not provide arbitrary and decisive answers on how to determine, document and verify transfer prices, but only indicates which areas should be taken into account when assessing specific transactions and the situation of a given entity.


In the area of comparability analyses, the COVID-19 Guidance focuses on the difficulties with obtaining comparable data. In principle, the analysis should rely on the observation of behaviour of unrelated parties operating under comparable circumstances. In the absence of up-to-date data on transactions between unrelated entities, OECD points to: (i) the use of data from other time periods, (ii) the possibility of inclusion of loss making comparables, (iii) the reference to budgeted financial information, (iv) the use of pre-pandemic data and indicators to assess the pandemic's impact, including its influence on market results, but also (v) to the use of more than one transfer pricing method or (vi) statistical and econometric method and (vii) the possibility of making adjustment at a later stage, when the relevant data becomes available.

When analysing the possibility of allocating losses and specific costs tied to the pandemic, the COVID-19 Guidance gives priority to the analysis of a specific taxpayer, along with its functional profile, and the scope of the risk incurred before and during a pandemic, while allowing modifications to pre-existing agreements with related parties, provided that they are made line with the arm’s length principle. In fact, the COVID-19 Guidance makes the possibility of allocating exceptional costs arising from COVID-19, or even losses derived from it, dependent on the entities' capacity to assume risk, referring to the force majeure provisions and, once again, to the observation of behaviour of unrelated parties.

Chapter III of the COVID-19 Guidance is dedicated to the impact of public and government aid on transfer pricing, the impact of aid on the comparability criteria and risk allocation between the parties to the transaction.

The OECD also comments on the impact of COVID-19 on the concluded and negotiated Advanced Pricing Arrangements (APA), pointing to the importance of critical assumptions and the possible approach in a situation of their breach.

The COVID-19 Guidance emphasizes the importance of the distribution of functions, assets and risks. The focus shifts to risk analysis, especially in terms of the risk-assuming party and the scope of risk, including: (i) marketplace risk (due to the decline in demand for certain products and services, (ii ) operational risk (disruption of supply chains and inhibited production; and (iii) financial risk (as borrowing costs for some industries have spiked and customers have delayed or defaulted on payments). Each chapter underlines the necessity of taking action by related parties, which in practice means shifting the onus of proof onto the taxpayer. In fact, the key assumptions should be documented by the taxpayer. These include: information about third party (unrelated party) behaviour, the functional profile and scope of the risk incurred, the degree of impact of the pandemic on the economic activity of a given entity or industry, and non-compliance or failure to meet a critical assumption of the APA.

Correct application of the COVID-19 Guidance requires taxpayer's active involvement and appropriate preparation of analyses, documents and calculations.

The OECD's COVID-19 Guidance provides useful hints and it will certainly prove helpful in the process of finalizing settlements between related parties in 2020, but perhaps also in 2021. It should also provide support to the authorities assessing the settlements at a later stage and find its application in the course of ongoing negotiations to conclude or amend APAs.

1The Transfer Pricing Forum is an opinion-making and advisory team for the Minister of Finance, established under the instruction of the Minister of Finance of 27 April 2018 on the establishment of the Transfer Pricing Forum