The transfer pricing policies of multinational entities (MNEs) will certainly not be business as usual in 2020 or even 2021 due to the disruptive impact of the Covid-19 pandemic.
Governments around the world are desperately trying to find additional revenue to make up for the stimulus payments they had to offer in order to keep their shrinking economies going. Transfer pricing (related-party cross-border pricing for goods and services) tax adjustments will be one area that receives even more attention in the near future, experts predict.
Speaking at a recent transfer pricing summit hosted by the South African Institute of Tax Professionals (Sait), Unilever tax director Karl Muller said few multinationals had disaster discovery plans in place to deal with anything of the scale of Covid-19.
Supply chains came under immense pressure, companies had to focus on funding and cash flow, and at the same time take critical decisions to keep themselves afloat.
Many of these decisions will have an impact on companies’ margins and their transfer pricing policies.
Monique van Herksen, partner at law firm Simmons & Simmons in Amsterdam, said one issue multinationals are faced with relates to permanent establishments and the effect of that on tax liabilities.
Extended stays due to pandemic
Many directors may have found themselves in a country where they do not normally work by virtue of the closed borders, and before they knew it the question arose whether their extended stay gave rise to a permanent establishment.
A permanent establishment is a fixed place of business which generally gives rise to income or value-added tax liability in a particular jurisdiction.
Van Herksen said governments have stated that they would be “careful” when considering whether a permanent establishment had been created.
“However, nobody stated that there will not be a permanent establishment issue because of Covid-19 circumstances,” she added.
Other issues relate to dealing with stimulus payments received by multinationals and the impact of this on transfer pricing. Many companies had also been restructuring to meet their supply chain and logistics demands. Van Herksen warned that multinationals can expect factual questions – such as when the restructuring started – for transfer pricing purposes.
Impact of restructuring
Michael Hewson, director at Graphene Economics, said in a separate interview with Moneyweb that any significant changes to intercompany transactions must be evaluated to determine whether there was a tax consequence.
“This is particularly important in the light of MNEs that have been impacted by Covid-19 and which may have needed to restructure certain transactions or arrangements in order to survive the economic consequences of the global pandemic.”
Companies had to relook their products, pack sizes and pricing to ensure their products were still available to “cash-strapped consumers”, said Muller.
Many had to change their business models out of necessity. New innovations and the use of existing product lines for different products were necessary just to keep efficiencies up.
He explained that many companies had to revert to strategic third-party outsourcing, they had to reconsider different forms of transport to move their products, and they had to put additional safety and hygiene measures in place.
All of this had an impact on their margins. They will have to look carefully at the changes that were made and the impact this had on intercompany costs and transfer pricing margins.
“The documentation supporting the margins is vital,” he reiterated at the Sait summit.
Transfer pricing challenges
Charl Hall, senior transfer pricing manager at Mazars, anticipates more transfer pricing challenges in Africa, mainly because many jurisdictions only recently introduced transfer pricing legislation and regulations.
“Transfer pricing is already very compliance-driven, with more enquiries coming from revenue authorities. MNEs must make sure that disclosures in their tax returns can be supported in the documentation of the transactions.”
Typical considerations will include the cost of idle personal, the cost of logistical and supply chain changes, the cost impact of less production shifts, changes to advertising, discounts and rebates to customers and suppliers as well as changes to credit terms, and costs incurred for new innovations and product changes, said Muller.
The pandemic will require a lot more documentation and a higher burden of proof.
“In four years’ time I can guarantee you when queries are lodged people [tax officials] are going to say that this [the impact of the pandemic] was not as bad as you [MNEs] say it was.
“So you better have that information right now,” Muller advised.
In the event of a transfer pricing adjustment, Hewson stressed the importance of the ability of a taxpayer to provide supporting documentation to substantiate prices that had been charged.
“Having an updated transfer pricing policy in place is the first step to supporting a company’s cross-border intercompany transactions.”
Muller also expects transfer pricing adjustments and disputes to increase in the near future.
New taxes have also been on the horizon, even before Covid-19.
According to Van Herksen, two new sections will be added to the United Nations Model Tax Convention – namely the taxation of technical services and the taxation of digital services.
Hall said digital services taxation is set to become a focal area from a South African and African perspective.
“It is coming, but the question is still [what] this digital tax will look like.”
Listen to Nompu Siziba’s interview with Mazars transfer pricing tax consultant Malan du Toit: