Multinationals receiving government subsidies to help them retain employees during the pandemic may come under greater scrutiny by tax authorities, who are keeping a close eye on how they use the money.
Tax authorities could examine whether the subsidies affect the way companies price their intercompany transactions. Those that transfer the benefit of the subsidies to offshore affiliates—and lower their taxable income—may invite government pushback in the form of lengthy audits or costly adjustments as governments hunt for revenue after the crisis, practitioners warned.
Countries that provide Covid-19 wage subsidies for employers include Australia, Canada, the Netherlands, Singapore, and New Zealand. The U.K has “furlough” payments.
“There is no doubt when the time is right there will be compliance activity to assess whether multinationals can support their transfer pricing positions and/or have used Covid as a reason for adopting certain positions,” said Zara Ritchie, national leader of BDO’s Australian transfer pricing practice in Melbourne.
Transfer pricing is the way multinationals value transactions between their entities as if they were unrelated third parties acting at arm’s length.
The Australian Taxation Office recently issued a warning to companies, saying that it expects Australian entities to retain the benefit of wage subsidies and not share them with foreign affiliates. The ATO said it will assess instances when relief payments under its JobKeeper program changed the price an entity paid or received in a transaction, or “was shown to effectively shift the benefit of the government assistance to offshore related parties.”
Taxpayers who don’t follow the ATO guidance will face greater scrutiny and should support their position with documentation and evidence, advised Nick Houseman, a transfer pricing and international tax partner at PwC in Sydney.
Multinationals should also carefully review subsidies across jurisdictions, follow any precedent or advice from tax authorities, and understand the impact of the crisis on their business and industry, practitioners said.
The key question for companies and tax authorities in assessing arm’s length pricing is whether third parties would factor in the wage subsidies in their pricing and under what circumstances, said Prita Subramanian, a principal in the Economic and Valuation Services practice of the Washington National Tax practice of KPMG LLP.
As more countries begin to formulate policies on wage subsidies, the Organization for Economic Cooperation and Development could provide some guidance. The organization is talking to 137 countries about crafting guidance on virus-related transfer pricing issues.
“One of the tricky thing for businesses that have operations around the world is that all of these furlough schemes or wage subsidies vary,” said Adam Dunnett, senior tax manager at Fitzgerald and Law in London. Having a consistent OECD framework would help, he said.
In guidance issued before the pandemic, the OECD said government interventions should normally be treated as part of market conditions. This means that wage subsidies shouldn’t be taken into account in setting an arm’s length price, said David Bond, a partner at Greenwoods & Herbert Smith Freehills in Australia.
Work to identify an appropriate scope for the guidance will continue this summer with a “better idea of timing and scope in September,” said Matt Andrew, head of the tax treaty, transfer pricing and financial transactions division of the OECD’s Centre for Tax Policy and Administration.
Singapore’s Inland Revenue Authority said it’s working on guidance. The question is whether a third-party vendor would share the benefit of the wage subsidies with the third-party customer under the same circumstances, IRAS said in an email.
“We hold the general view that third parties are less likely to do so,” IRAS said. The revenue authority said it’s participating in OECD discussions and hopes to “achieve a consistent international view on this, to help minimise cross-border tax disputes.”
Canadian Revenue Agency spokesman Paul Murphy said the government’s assistance position is already contained in its transfer pricing policy memorandum. According to the memorandum, government subsidies shouldn’t be shared among entities unless there’s evidence unrelated companies would do so under similar circumstances.
Given the nature of the Covid-19 assistance, it’s unlikely that evidence would support sharing this type of emergency assistance, which would be expected to form part of the recipient’s tax base, he said.
Multinationals should examine any context or criteria provided as part of local subsidies as well as facts and circumstances of the business and industry, BDO’s Ritchie said. Companies operating in multiple jurisdictions should have visibility over subsidies in those jurisdictions and how those subsidies fit into the corporate transfer pricing policy, she said.
“We’re in unchartered territory and the views of the local governments will vary country by country depending on the economic circumstances of the country. Multinationals need to be looking at both the headquarter perspective and local perspective,” Ritchie said.
Companies will also need to step up their game with documentation, said Somil Goyal, chief operating officer of Adjoint, a real-time financial management platform for corporate funds in London.
To avoid future adjustments, companies claiming to have market evidence of arm’s length parties sharing government support should keep documentary evidence detailing how the assistance was accounted for, Murphy said. They should also back up their position that arm’s length parties share government assistance.
Finding comparable data for valuing intercompany transactions will be challenging, said Daniel McGeown, leader of transfer pricing services at BDO LLP in Canada.
The issue has been studied with the investment tax credits for scientific research and experimental development. “We could never find evidence of what third parties were doing with that form of government assistance. I think the same is going to hold true for these wage subsidies,” he said.