KPMG report: Uneven transfer pricing implications of COVID-19 pandemic

The coronavirus (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 multinational entities’ transfer pricing arrangements.

A recent 2021 edition of the OECD’s annual revenue statistics includes the first OECD-published data reflecting the tax revenue implications of COVID-19 across OECD countries. The report contrasts the 2020 statistics against those from the global financial crisis of 2008-2009. While the OECD report points prominently to the limitations of the data, recognizing 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 was to be exercised, drawing on contemporaneous data.

While the OECD’s new economic data is still slightly delayed, it is more recent than that typically appearing in commercial databases, and certain broad and interesting themes can be identified.

The initial recession due to the COVID-19 pandemic was more severe than that due to the 2008-2009 financial crisis, 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 outcome following the financial crisis of 2008-2009 (clearly there is some uncertainty here, depending on the evolution of the pandemic). Furthermore, while the effects of the 2008-2009 financial crisis were felt more evenly across the economy, (mainly because the finance and banking sectors on which it was centered were strongly connected to the rest of the economy), the impact of COVID-19 has varied markedly by industry sector.

The initial OECD guidance from 2020 expressed skepticism that data from the 2008-2009 financial crisis (or any other crisis) would be reliable in the current environment. In addition to the time elapsed, the identified differences in the current report would appear to bear that skepticism out in most or all cases.

The sectoral imbalance of the pandemic’s effects also means that an assumption that there would be 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 stayed home, voluntarily or by order of public health requirements. Travel, the arts, entertainment, sports, hospitality, and brick-and-mortar retail have all been well down from pre-pandemic volumes.

The OECD emphasized 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. While 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.

Read a December 2021 report prepared by the KPMG member firm in the UK