In 2008, we witnessed the global financial crisis (GFC), a period of extreme stress in global financial markets and banking systems. Many banks around the world incurred large losses and relied on government support to avoid bankruptcy. Millions of people lost their jobs as the major advanced economies experienced their deepest recessions since the Great Depression in the 1930s.
The Covid-19 pandemic has triggered the most severe recession in 2020 and is causing enormous damage to the world economy. It goes without a saying that the economic downturn will impact a group’s transfer prices, analysis and documentation, more so with the BEPS Action Plans in place and the high level of transfer pricing scrutiny across the globe.
Tax authorities around the world are beginning to adopt new measures designed to help taxpayers meet their compliance-related obligations. Recently, the Organisation for Economic Co-operation and Development (OECD) issued questionnaire to business group members to address transfer pricing compliance challenges caused by the COVID-19 crisis and to identify any issues that require clearer guidance.
Against this backdrop, the Australian Taxation Office (ATO) provided its take on COVID-19 economic impacts on transfer pricing arrangements to assist those economically affected by COVID-19 when preparing documentation to support the arm’s length nature of their transfer pricing arrangements.
Some of the key areas addressed by ATO are as follows:
a) How will the ATO assess the economic impacts of Covid-19 on transfer pricing arrangements?
The ATO seeks to evaluate and understand the facts and circumstances of taxpayers who are operationally and financially hit by the COVID-19 pandemic, giving emphasis to the following >>
Key takeaway: Document and gather evidence to support any changes to, or impacts on, your business as a result of COVID-19.
|FAR||Function, asset and risk profile of the Australian entity before and after COVID-19|
|Economic Circumstances||Actual economic impacts of COVID-19 on the Australian operations should be outlined and evidenced|
Effects of obligations or material terms and conditions that are varied, amended or terminated
|Evidence of impact||Evidence of the impact (if any) of COVID-19 on the specific product and service offerings and the effect on financial results|
|Evidence of business strategies||Evidence of changes in business strategies as a result of COVID-19, including decisions made, outcomes sort and actions taken.|
b) How to support the arm’s length nature of your transfer pricing outcomes?
The ATO is aware that the analyses of comparable company benchmarking may not reliably support arm’s length outcomes of continuing transfer pricing arrangements where they are impacted by COVID-19. Thus, the ATO seeks to understand the following financial outcomes taxpayers would have achieved ‘but for’ the impact of COVID-19:
Key takeaway: Document the rationale and gather evidence
to support the financial outcome of your business with details on any adjustments performed on your profitability.
|Detailed profit or loss analysis||
The analysis shows changes in revenue and expenses, with an explanation for variances resulting from COVID-19
Details of profitability adjusted to where the outcome would have been if COVID-19 had not occurred
|Rationale and evidence on changes in operating margins||
Rationale and evidence for any increased allocation of costs or a reduction of sales (and subsequent changes in operating margins) to the Australian entity
|Evidence of impact||Evidence of any government assistance provided or affecting the Australian operations.|
c) What about Practical Compliance Guideline (PCG) 2019/1 and COVID-19 impacts?
The ATO is not seeking to review PCG 2019/1 due to the effect of COVID-19. The ATO considers the appropriateness of PCGs where
analysis or further benchmarking indicates there is a material movement in the information used to develop the risk assessment framework.
d) How are taxpayers with Advance Pricing Arrangement (APA) assessed as a result of the COVID-19 pandemic?
For APAs that are already in place, the ATO highlighted that the impact of COVID-19 could potentially result in a breach of the critical assumptions in the APA. As such, taxpayers are encouraged to proactively engage with the ATO as soon as the likelihood of a breach of the APA terms occurs.
In such circumstances, the ATO seeks to understand the impact on the APA of the breach and consider appropriate outcomes, including:
As for taxpayers currently engaged with the ATO in the APA process but do not have an agreed APA in place, the ATO expresses its concern for taxpayers that are hit by the COVID-19 pandemic that it may be difficult to progress with the APA application without objective evidence of any impact or high uncertainty around potential outcomes. The possible approaches for such cases would be to put the applications on hold or mutually end them until there is greater level of certainty on the impact.
Key takeaway: Assess the impact of COVID-19 on your APA arrangement, identify and highlight any breach of critical assumptions in your APA to the ATO.
How can we help?
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Singapore is often a preferred location for setting up headquarters as the door to conduct business in Asia. The IRAS has released its views on how Singapore HQ's should plan and implement their transfer pricing framework. Want to know more? Read our article with our views on IRAS TP Guidelines for Singapore HQs.
The Malaysian Finance Bill 2020 incorporates transfer pricing-related changes to the current Income Tax Act, 1967 (“ITA”). The changes permit significantly greater authority to the Malaysia Inland Revenue Board (“MIRB”) and re-emphasises the importance of transfer pricing compliance, with effect from 1 January 2021.
JobKeeper forms part of taxable income in the tax return. Makes sense, it is a subsidy against wages, so I am sure there are no surprises there, but how do you assess the arm’s length financial outcomes of the entity for transfer pricing purposes?