A year on since the catastrophic spread of COVID-19 dramatically impacted the lives and businesses of people around the world, the effects continue to be felt. Over the course of 2020, global middle market companies were required to reset supply chains, review the effectiveness of their group structures, and re-evaluate the transfer pricing implications of transactions for intra-group goods and services. This has been paired with increased reporting requirements both globally and locally, and an ongoing revenue authority focus on transfer pricing.

There is much more to come in terms of change and transformation for growth focused, entrepreneurial businesses. However, with vaccine roll-outs ongoing, we are now moving into a second stage of the pandemic and a more positive direction.

Alongside a group of RSM’s transfer pricing leaders, International Tax Leader Rob Mander share some interim findings on the key issues that have arisen so far and the ongoing actions that businesses should be taking as a consequence.

An introduction to transfer pricing – what you need to know

Overall, industry experts agree that as the global economy looks to recover from the pandemic, transfer pricing models are likely to garner more attention. For businesses that have been negatively impacted, there are numerous benefits to re-examining their transfer pricing between entities across different jurisdictions, to manage cash flow and assist their fiscal recovery. Until now, the main area of economic focus has been on the damage to businesses but in the medium to long term, that area of focus may well shift towards how multinationals that profited from the pandemic have been approaching their tax models, including transfer pricing, particularly under the increasingly watchful eye of revenue authorities across the world.

“Authorities are likely to take different positions based on their own economic issues and agendas,” says RSM Australia’s Liam Delahunty. “It is, therefore, important for taxpayers to consider the interplay between the various revenue authorities when planning their transactions and transfer pricing policies.”

It is not only revenue authorities that are experiencing different impacts on their results as Daniella Marenchino of RSM Italy explains, “Multinational Enterprise Groups (MNE’s) are experiencing different results across their different entities within the MNE Group. In some cases, these results were heavily impacted by the actions of governments to limit the spread of the virus (such as lockdowns) as well as by the global trends of the sector in which the group operates”.

John Jones of RSM South Africa adds, “Given the broader global economic downturn, for example reductions in interest rates, existing transfer pricing policies may very well be inappropriate and require significant revision. This is aligned with the fact that globally revenue authorities will focus on transfer pricing to shore-up falling revenue collections”.

What issues are critical to transfer pricing in 2021?   

In terms of necessary steps, action items will, naturally, need to be adapted according to country, aligning with the needs of the relevant MNE group from a global perspective globally. However, some of the key things to be covered include:

  • Review the extent of any guidance that has been provided by the country’s revenue authority (e.g. in Italy and South Africa limited guidance has been provided, whereas in Australia, extensive information has been released to assist taxpayers with transfer pricing risk management)
  • Clearly explain, with adequate supporting documentation, the impact the economic crisis has on the local business and on the overall global activity of the MNE
  • Adjust the results of benchmarking analyses to align the arm’s length results (which generally consider previous years’ results) with the current economic situation
  • In cases of specific financial support that was provided to assist companies within the MNE Group that are in financial difficulties, it is important to prepare contemporaneous analysis and documentation explaining the operations and the cash management structure
  • The impact of the pandemic on Advance Pricing Agreements (APA) that have been entered into should be documented, including potentially approaching the revenue authority for a revision of the APA
  • Update the transfer pricing policy so it can withstand scrutiny from the relevant revenue authorities - transfer pricing is a key review/audit risk for all MNE’s
  • Review and document significant transactions that have taken place in relation to intangible assets (e.g. changed royalty rates, transfers of intellectual property to other countries),
  • Consider how government assistance has been treated (for example the ATO has advised Australian taxpayers to carefully consider transfer pricing adjustments, given that Government assistance was designed to stimulate the Australian economy and should not be passed back to the wider global group).

Daniela Marenchino concludes, “It is important for companies that are part of a MNE Group to describe, in detail, the effect that the present pandemic has on their local business as well as on the global business of the entire Group”.

Tristan Hedley of RSM Australia summarises the position in Australia by saying, “The ATO has conceded that revised benchmarking will be of little value in the short term as the economic implications of Covid-19 will not be seen in databases for some time. As such, the ATO have developed some questions that taxpayers should consider when addressing their documentation requirements i.e. how has COVID-19 impacted on the budget or forecast”.

From a global perspective, documentation will be more important than ever, as the benefit of hindsight may make a reasonable decision appear unreasonable, so the rationale and support behind business decisions should be as contemporaneous as possible.

What should MNE’s be doing now to prepare for transfer pricing?

The need for businesses to restructure supply chains, develop new customers and adjust to remote working arrangements will often mean the value generation process has significantly changed over the last twelve months. As a result, financing, operations, and policy will all need to be reviewed.


The general trend towards lower interest rates, plus governments’ influence on the financial markets and conditions through tax deferrals, debt guarantees, grants and employment subsidies all have an impact on transfer pricing. Matters to check include:

  • Review interest rates for intercompany funding and adjust where applicable whilst ensuring conditions remain arm’s length
  • Document re-negotiation of the contractual terms of financial agreements, not only interest rates, but also principal repayments due and/or the termination/renegotiation dates
  • Consider the impact of Government actions to increase liquidity in the market (e.g. credit guarantees)
  • Thin capitalisation – check the impact of asset impairment on values used in the financial statements. Are other options such as the worldwide gearing ratio available, and potentially more applicable?

Liam Delahunty explains that, “With the reductions in market interest rates, taxpayers should review their interest rates for intercompany funding and adjust where applicable whilst ensuring conditions remain at arm’s length. The ATO has also recently released guidance that interest-free loans are unlikely in many cases to reflect arm’s length conditions and that efforts should be made to ensure the substance and form of financing are in alignment”.

“In Italy, under certain circumstances the Government provides a non-remunerated guarantee to allow companies to obtain financing from third party creditors,” offers Daniela Marenchino.

“As well as Government support, due to the severe impact of COVID-19, it should be noted that a local entity may also obtain a no cost guarantee provided by the MNE Group to face the financing difficulties related to the COVID-19 crisis. It is essential to take into consideration all the special factors that have emerged during the pandemic.”

On the same topic, Tristan Hedley notes that, “The ATO has already been active in communicating its concerns that taxpayers could use COVID-19 as an excuse to reduce Australian profits inappropriately”.

Transfer pricing documentation

A lack of transparency over transfer pricing has, historically, been known to impact the value of a company being acquired or sold by private equity entities. If the authorities’ approach of placing a greater external focus on tax affairs is anything to go by, this is an area that will require even greater consideration than before the pandemic.

Good quality contemporaneous documentation will therefore be essential to support transfer pricing in 2021. With that in mind, businesses should:

  • Consider the impact of comparable data in benchmarking studies and check other options that could be considered in the absence of useful data
  • Review how group costs should be allocated to subsidiaries because of the additional time and effort that was spent managing the impacts of COVID-19
  • Check whether any simplified transfer pricing documentation options are available,
  • Business restructures are likely to be closely scrutinised and should be thoroughly documented with supporting market valuations
  • Ensure documentation reflects a complete view of the MNE’s global business. The economic downturn may have created losses at a group level, raising questions on how to treat routine service providers within the MNE Group
  • The MNE should prepare market analysis documenting the impact of COVID-19 on the specific sector in which the company operates, to support negative results that may been achieved.
  • Supply chains may have been modified to ensure product supply but this in turn would result in a change in functions and risks being assumed within MNE structures.

A look to the future

MNE’s have adjusted significantly in 2021 to meet the impacts of COVID-19 on their business, and they should be prepared to facilitate further change during 2021.

“The short-term impact of COVID-19 needs to be considered by MNE’s in line with their expectations in the medium-to-long term,” says Liam Delahunty.

In Australia, the ATO is currently offering concessional administrative support and assistance, although it is expected that over time it will begin to scrutinise tax matters more closely, given inherent Government pressure for increased tax revenues”.

Daniella Marenchino agrees, “It is essential to understand the medium-and long-term effects of this economic crisis when evaluating the measures that should be implemented to protect the overall business of the Group and provide support for local entities.

“More than ever, to support the application of their Transfer Pricing Policy MNE’s should ensure that they have prepared strong and reliable documentation. The MNE Group should analyses the impact of COVID-19 on their global business as well as on the local entity to correctly address the situation, apply available resources and monitor the impact on the MNE Group’s Transfer Pricing Policy”.

John Jones concludes “Revenue authorities around the globe are approaching the issues arising in different ways and it thus becomes vital that any revision or review of existing approach is done using a global and holistic approach, to ensure the correct results are achieved across all relevant jurisdictions”.

Global supply chains, international customers and digital innovation will continue to drive cross-border transactions in 2021. Therefore, MNE’s will need to exert great diligence to ensure their transfer pricing policies and procedures remain up to date, as business conditions continue to evolve.


Rob Mander
International Tax Services