Bloomberg Tax
July 6, 2020, 8:46 AM

Virus-Era Tax Planning Qualms Fuel Hope for Global Guidance

Rossella Brevetti
Rossella Brevetti
Isabel Gottlieb
Isabel Gottlieb

Multinationals struggling with tax planning amid pandemic shutdowns and an economic downturn are hoping an OECD-led effort could help prevent future tax disputes with authorities around the world.

The Organization for Economic Cooperation and Development is talking to 137 countries about crafting guidance on virus-related issues companies face with their transfer pricing—the way multinationals value the transactions between their entities. That potential guidance could help set an international approach for how tax authorities and companies should handle pandemic-related issues.

If tax authorities can find common ground, that could prevent years of companies and governments wrangling over the tax treatment of intercompany transactions made during the pandemic, practitioners say.

“Transfer pricing has always been a balancing act for companies, in that they have to satisfy slightly different applications of the rules by different jurisdictions,” said Steven Wrappe, national technical leader of transfer pricing at Grant Thornton LLP in Washington.

“Anything that comes from the OECD has credibility because of its consensus-based development,” he added.

Governments and companies need clarity on finding comparable data for valuing intercompany transactions; determining how to allocate losses to low-risk entities; taking measures to boost liquidity; and renegotiating agreements that no longer are economic under current circumstances, practitioners say.

The OECD in June sent a questionnaire to companies asking about the main challenges they’re experiencing. The organization is looking for real-time information on what companies are facing, and their answers will inform the OECD’s next steps on potential guidance, Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, said in a July 2 statement to Bloomberg Tax.

The organization is meeting with countries to explore, “whether it would be possible to develop additional guidance on specific issues, where current guidance is limited and COVID-19 is having a particularly material impact,” he said.

If the OECD decides to develop guidance, it would hold a public consultation in the fall, he said.

The effort comes as some countries begin attempting their own rules. For example, the Australian Taxation Office issued guidance in June to assist companies affected by Covid-19 with preparing documentation to support their tax positions. The IRS is allowing electronic documentation and urging multinationals to proactively engage in discussions about their specific situations. And India has said it’ll try to be flexible with changes to some multinationals’ arrangements.

The OECD released guidelines in April on how tax authorities should interpret residency and permanent establishment provisions in tax treaties during the pandemic. But transfer pricing guidance will take longer, because countries need to agree so the approach is applied consistently.

‘Comparables Will Be Off’

Practitioners are struggling with how to value intercompany transactions during the pandemic’s economic upheaval. Multinationals value transactions between their entities as if they were unrelated, a principle known as the arm’s length standard. To determine how unrelated parties would act, companies base those transactions on comparables, or real-world examples.

Current transfer pricing guidance fails to give multinationals “direction around comparatives during this unprecedented time,” said Adam Dunnett, senior tax manager at Fitzgerald & Law in London.

The volatile economy in 2020 means that the pricing of real-world transactions may change from previous years.

“Comparables will be off. There is a need to have some way to address that,” said Carol Doran Klein, vice president and international tax counsel at the U.S. Council for International Business.

And the data on how real-world companies valued their transactions during the pandemic won’t be available until next year, said Daniel McGeown, leader of transfer pricing services at BDO LLP in Canada.

If there is no OECD guidance soon, companies will do their best within the current framework and apply the arm’s length standard to the best of their ability, said Glen Marku, transfer pricing managing director and Midwest leader at Grant Thornton LLP.

For companies planning new transactions in 2020, restructuring legacy transactions, or estimating reserves for financial statement purposes, 2019 was a very different year and not an appropriate benchmark for many industries, Marku said. Companies aren’t sure what financial data to rely on given the lag in availability of that data, he said, adding that companies also wonder if adjustments should be made to 2019 data and if so, what best practices should be followed.

Losses, Cash Flows

Companies are also hoping for guidance on how to attribute losses—which many will experience this year—following the arm’s-length principle.

Transfer pricing rules require companies to allocate the majority of profits to the entity that takes on risks, performs critical functions, makes investments, or develops or holds intellectual property. Entities that only assume a low risk or perform routine functions—like manufacturing or distributing products—typically earn a fixed return.

But if the company experiences losses, it’s not clear whether the losses should be booked only at the risk-taking entity, with the normal return paid to the low-risk entity, or shared across the structure.

Questions on whether companies should attribute losses to their limited risk entities—and how much—come up in almost every discussion around transfer pricing and Covid-19, said Stephen Blough, a tax principal in the economic and valuation services group of KPMG LLP’s Washington National Tax practice.

The OECD specifically mentioned limited risk distributors on a May webcast as an issue virus transfer pricing guidance could address.

Companies struggling to stay afloat may try to help ease a cash crunch through intercompany transactions—for example, withholding payments on related-party transactions to keep cash in certain entities or jurisdictions, or making pre-payments ahead of certain intercompany transactions to put cash into others. OECD guidance will help them understand whether and how they can do so, McGeown said.

“Cash flow is a big issue that clients would like covered by the OECD,” he said.

Renegotiation of Contracts

It would also be useful for the OECD to provide guidance on thorny legal issues surrounding renegotiation of longer term contracts, Doran Klein said. The main concern is whether tax authorities will respect a renegotiated contract between related parties if the contract didn’t provide for renegotiation, she said.

Other concerns include the impact on advance pricing agreements among taxpayers and tax authorities, Blough said. An issue that could arise is whether circumstances around the pandemic result in a violation of one or more of the “critical assumptions” of an APA. If a critical assumption is breached, the APA may need to be suspended or revised, he said in an email.

An APA may no longer be economic under current circumstances, Doran Klein said.

“The economics of these deals have changed dramatically in the last six months. Are you stuck with your APA even though you would never negotiate that now?” she said.

To contact the reporters on this story: Rossella Brevetti in Washington at; Isabel Gottlieb in Washington at

To contact the editors responsible for this story: Meg Shreve at; Sony Kassam at