Transfer prices in times of COVID-19

THE FOLLOWING ISSUES REQUIRE SHORT-TERM ACTION

1. Transfer pricing policies for so-called routine enterprises assumed to achieve low but stable margins

• May or must routine margins be adjusted?
• If so, to what extent? Is it conceivable to suffer losses through routine companies?
• Difficulty: Delayed effects of the crisis based on commercial databases - econometric adjustments required
• Can contracts with contract manufacturers be suspended or terminated at short notice (loss of business base due to a lack of demand?)

2. Is there a need for adjusting intra-group services?

• Often these are remunerated within the framework of a cost-allocation system or bilaterally based on a cost-plus system known as "low value adding services" with a uniform cost mark-up rate of 5%. Is this appropriate under the given circumstances?

3. What effects can be expected on existing license agreements?

• Sales-driven licenses vs. profit-driven licenses with basic amounts
• Should license rates be adjusted?

4. Transfer of intangible assets and transfer of functions

• How reliable are value determinations made  by applying the DCF valuation method under relatively stable forecast situations resulting in expected stable values?
• What proactive steps should be taken in applying price adjustment clauses contractually agreed upon?
• Are there any reasons for transferring hard-to-value intangible assets within the group at this time?

5. Securing liquidity

• Cross-border cash pooling is an important management tool
• Financial effects due to the group rating deteriorating - complete transfer within the group of companies?

6. Restructuring projects

• Who bears the restructuring costs in a crisis?

7. Proactively providing evidence by documenting the motives for and the extent of  transfer pricing adjustments

• Deviations from existing transfer pricing principles:
  • Distribution of functions and risks within the Group
  • Group-wide transfer pricing guidelines
  • Intercompany contracts
  • Reduced margins or sharing the loss of routine business

must be carefully documented as extraordinary business transactions in all cases

• Strengthening the position of the taxpayer in the event of any subsequent tax audits.

This article was written by our colleagues from Mazars Germany.