COVID-19 complexity – the uneven transfer pricing implications of the pandemic

The COVID-19 pandemic has had profound consequences worldwide. Apart from the many social effects, the pandemic has had widespread and varied economic effects. These continue to cause significant practical challenges for multinationals’ transfer pricing arrangements. The recent 2021 edition of the OECD’s annual Revenue Statistics includes the first OECD-published data reflecting the tax revenue impacts of COVID-19 across OECD countries (the OECD’s key findings are discussed in a separate article in this edition of Tax Matters Digest). The report contrasts the 2020 figures with those from the global financial crisis (GFC) of 2008-2009. While the OECD points prominently to the limitations of the data, recognising that many important indicators are subject to revisions and difficulties in information gathering, the tax consequences of COVID-19 are sufficiently important to warrant this initial analysis. In particular, the implications for comparability are nuanced: a blanket assumption of reduced profitability is not justified.

In December 2020 the OECD published initial guidance setting out suggestions for ascertaining the arm’s length nature of a business’s transfer prices in the absence of reliable comparable data. Among these, the OECD suggested the use of macroeconomic information to further the understanding of the context in which the controlled transactions occurred. Pragmatic, reasonable commercial judgement should be exercised, drawing on contemporaneous data. While the new economic data is still slightly delayed, it is more recent than that typically appearing in commercial databases and some broad and interesting themes can be identified.

The initial recession due to the pandemic was more severe than that due to the GFC, and unsurprisingly was more widespread across both developed and developing countries. The medium-term outlook following the pandemic, by contrast, may be less severe than the outturn following the GFC (clearly there is some uncertainty here depending on the evolution of the pandemic). Furthermore, whilst the GFC’s effects were felt more evenly across the economy, (mainly because the finance and banking sectors on which it was centred were strongly connected to the rest of the economy), the impact of COVID-19 has varied markedly by sector.

The initial OECD guidance from 2020 was sceptical that data from the GFC or other crises would be reliable in the current environment. In addition to the elapsed time, the identified differences in the current report would appear to bear that scepticism out in most or all cases.

The sectoral imbalance of the pandemic’s effects also means that assuming universally reduced profitability would be mistaken. Consumer spending on durables has been strong in advanced economies and the pandemic has increased demand for products such as electronics (to support remote working and learning) and plastic, rubber, and textiles to produce personal protective equipment.

By contrast, contact-intensive services have suffered as the public stay home, voluntarily or by public health requirements. Travel, the arts, entertainment, sports, hospitality, and brick-and-mortar retail have all been well down on pre-pandemic volumes.

The OECD emphasises that the data and analysis are preliminary, so must be treated with caution. Some aspects may well change as new information emerges. However, at present it seems that the broad picture is significantly more complex than might have been predicted in 2020. Whilst the pandemic has affected most or all segments of the economy, the effects have been highly diverse. The outlook likewise varies by sector as the pandemic evolves, restrictions are imposed and lifted, pent up demand is released, and companies take and then unwind remedial actions. A comparability analysis taking the effects of the pandemic into account must likewise be nuanced to be reliable.

For further information please contact:

• Charles Havisham
• Phil Roper