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An Overview of Transfer Pricing guidance issued by different countries to address challenges due to COVID-19 crisis

The COVID-19 pandemic has resulted in a worldwide disruption of business operations leading to severe losses and gaps in the supply chain for most businesses. Tax Authorities across the world have provided certain guidelines on transfer pricing requirements to be fulfilled by the businesses to avoid litigations in the times to come. The guidelines issued by countries such as Australia, New Zealand and Singapore predominantly elaborate on the difficulties that might be faced by the businesses in preparing the relevant documentation, the need, and base for term testing, APA arrangements, etc.

Highlights of guidance issued by different Tax Authorities


  1. Assess the economic impacts of COVID-19 on transfer pricing arrangements
    1. Functions, Assets and Risk profile (FAR): The FAR profile of the entity before and after COVID-19.
    2. Economic circumstances: The taxpayer will need to outline and provide evidence for the actual economic impact of COVID-19 on its business operations. Further, this impact may be supported by a broader analysis of how the relevant industry is affected in which the taxpayer operates.
    3. Contractual arrangements: The taxpayer will need to explain the impact on contractual arrangements between himself(taxpayer) and its related parties (including termination clauses, penalty notices, force majeure, or other clauses if applicable).
    4. Impact on the product and/or service offering: The taxpayer will need to demonstrate the impact of COVID-19 on the specific product and/or service offerings it is dealing with and how this has affected the financial results.
    5. Business strategies The taxpayer will need to provide evidence related to the changes in its business strategies as a result of COVID-19. This may include key decisions made, expected outcomes, and actions taken to give effect to those strategies.
    6. Change in/ impact on business The taxpayer will need to gather evidence to support any changes to the business or impacts on the business as a result of COVID-19.
  2. How to support the arm’s length nature of transfer pricing outcomes:
    1. The Australian Taxation Office (ATO) had acknowledged that the analyses of comparable company benchmarking might not reliably support the arm’s length outcomes of the continuing transfer pricing arrangements where they are impacted by COVID-19. On this basis, the ATO has stated that they will seek to understand the financial outcomes that are achieved by the taxpayers and which are impacted due to COVID-19. This analysis may include:
    2. A detailed profit and loss analysis (including variance analysis of budgeted (pre-COVID) versus actual results);
    3. Details of adjusted profitability if COVID-19 had not occurred;
    4. Rationale and evidence for any increased allocation of costs or a reduction of sales taking into consideration its FAR profile;
    5. Evidence of any government assistance provided or affecting the Australian operations.
  3. Practical Compliance Guideline (PCG) 2019/11 and COVID-19 impact

    The ATO has specified that they are not currently seeking to review PCG 2019/1 due to the effect of COVID-19. They will consider 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.

  4. Advance Pricing Arrangement (APA)
    1. Breaching an APA due to COVID-19

      The ATO has acknowledged the fact that business operations that are negatively impacted due to COVID-19 can result in a breach of critical assumptions based on which the APA was agreed. In such circumstances, the ATO has encouraged the taxpayers to engage as soon as an APA breach occurs or is likely to occur. Further, based on the assessment of breach, the ATO has indicated that the likely outcomes could be:

      • No change in the agreed APA; or
      • Renegotiating the APA over the time period of the demonstrable impact; or
      • Suspending or modifying the APA for a set period.
    2. Those currently in an APA process without an agreed APA

      The ATO has clarified that standard APA processes and analyses will apply where the economic performance of the taxpayer is not significantly impacted by COVID-19. Further, they are willing to place APA cases on hold or mutually end the APA process where the taxpayer is significantly affected by COVID-19. With regard to bilateral APAs, it has been clarified that it will need to be considered in consultation with the corresponding jurisdictions.

New Zealand

  1. Arm’s length principle
    1. Transactions must continue to be conducted in accordance with the arm’s length principle during the COVID-19 pandemic based on existing OECD TP Guidance issued in July 2017. The New Zealand Tax Authorities have recognized that practical difficulties in applying the arm’s length principle may arise during this time. It is critical to have contemporaneous documentation recording specific facts and circumstances faced by the businesses and their compliance with the principle.
  2. Documenting COVID-19 impacts
    1. Identify and collate evidence to document the nature, duration, and extent of any material COVID-19 related impacts on the group and local business;
    2. Document relevant group and local business’ responses to the pandemic, including, for example, any changes in business strategies, changes in the characteristics of product or service offerings and so forth;
    3. Identify and explain any changes in the group and local business functions, assets and risks during the impacted period, including how these relate to the business’ exposure to, or mitigation of, COVID-19 impacts;
    4. Identify and explain any changes in intra-group transactions and contractual terms;
    5. Document the supporting rationale for any changes to intra-group transfer prices, including why they are considered to be arm’s length in the circumstances;
    6. Identify the impact of COVID-19 on the overall profitability of the MNE group and the local entity.
  3. Arm’s length support for financial outcomes
    1. In exceptional economic circumstances, identifying reliable, comparable data to support the arm’s length nature of financial outcomes may be difficult, particularly in the short term. In the absence of comparable data, a pragmatic approach is to refer to pre-COVID-19 expectations and analyze variances that have arisen due to COVID-19 impacts, both positive and negative. This includes quantifying the financial consequences of the identified COVID-19 impacts, providing supporting evidence for the analysis and explaining in detail:
    2. Why local sales are lower than expected;
    3. Why local expenses are higher than expected;
    4. Any unusual financial items;
    5. Any government assistance received;
    6. The impact of any amended intra-group transactions; and
    7. Any adjustments made.


  1. TP Documentation

    In light of the potential COVID-19 impact, companies are advised to provide additional qualitative information in their transfer pricing documentation to substantiate the arm’s length nature of their transfer pricing outcome. The list of additional qualitative details includes, the effect of COVID-19 on the industry and the impact on the taxpayer, comparative functional analysis, change in related party arrangements, compare the change in financial results and variance analysis, justify the impact of COVID-19 on the profitability results and specify if any specific government assistance is received.

  2. Term Testing

    Taxpayers were required to consult the Singapore Tax Authorities before applying term testing (combining multiple-year financial results as against annual results). Considering the potential impact of COVID-19, taxpayers are advised that they need not consult the IRAS for application of term testing if the annual testing may result in volatile results due to the impact of COVID-19.

  3. APA

    Singapore Tax Authorities will continue to accept the new APA application. Regarding APA application in progress, the taxpayer should assess whether any transfer pricing implications are arising from COVID-19, which may impact the APA application. If so, the taxpayer is encouraged to provide the relevant details for the same.
    Regarding the existing APA, the taxpayer should review and assess whether there is any breach of the terms and conditions in the existing APA agreement and notify the same to the Singapore tax authorities. Further, where there is an existing APA that covers the COVID-19 period, the taxpayer should evaluate if COVID-19 does not significantly impact the business operations and economic performance. In case of any significant impact, the taxpayer may choose to consider filing a new APA application rather than a renewal.

  4. Conclusion:

    The guidance provided by the tax authorities in Australia, New Zealand, and Singapore is a well-timed reminder for taxpayers that are members of a multinational group that historic transfer pricing approaches will not be suitable for the financial years impacted by COVID-19. A detailed evaluation is required to assess the impact of these peculiar circumstances generated by COVID-19 on the business. The relevance of such an analysis is crucial, given the relatively unique economic circumstances applicable to businesses and individuals in the relevant jurisdictions.

What to expect from the Indian Tax Authorities?

Transfer Pricing Documentation

The Indian Tax Authorities should adopt a similar approach to issue guidance to taxpayers about COVID-19’s effect on transfer pricing policies. They can provide a set of detailed FAQs on the below aspects based on the experience gathered till date while dealing with the taxpayers at different forums (i.e., transfer pricing audits, APA, safe harbour, etc.).

  1. Insights on identifying and collating evidence to document the impact of COVID-19 on the business. Illustrations and practical scenarios can be provided w.r.t. what is the level of documentation expected from the taxpayer to support the economic impact of COVID-19.
  2. Any changes in the group and local business FAR, intra-group transactions, and contractual terms during the impacted period. Whether one-time (short term arrangement) effect of the transfer of FAR to another location will lead to an outcome of restructuring and resultant exit charge obligation on the taxpayer.
  3. Document to support any changes to intra-group transfer prices, including why they are considered to be arm’s length in the circumstances.
  4. Factors to identify the impact of COVID-19 on the overall profitability of the MNE group and the local entity.

Guidance to support Arm’s length outcome

Given that the Indian Tax Authorities have historically adopted the approach outlined above to verify the profitability earned by the taxpayers (in case of a loss scenario or when profits are understated), there is an increased obligation on the taxpayers to make sure that such analysis is carried out and maintained in order to defend a possible operating loss scenario or low profit margins for both the current, and coming years due to COVID-19.
Benchmarking analysis for determining the arm’s length price in consequence of COVID-19 may prove to be a cumbersome task with regard to transfer pricing arrangements entered into during FY 2019-2020 and FY 2020-2021. This can be more specific pertaining to:

  1. a. Usage of weighted average financial data points of the comparable companies for the latest three FYs against the weighted average result of the taxpayer for three FYs;
  2. Usage of single year financial data of the comparable companies for the current year against the result of the taxpayer for the current year;
  3. Guidance on how economic adjustments, albeit downturn adjustments in the COVID-19 scenario (e.g., capacity utilization, working capital, overall industry movement, etc.) should be made on the comparable companies; and
  4. Treatment of the outlier comparable companies in the comparability analysis, especially high loss-making companies, to even out the impact of COVID-19.

Safe harbour law provision

As of now, there is no guidance on safe harbour provisions for FY 20-21 and whether safe harbour rates would be revised based on the impact of COVID-19 disruptions. However, it will definitely be a positive and welcome move for the taxpayers if the Indian Tax Authorities can shed some light on whether they can expect a decrease in the existing mark-up percentages for different categories of transactions covered in the safe harbour provision in the backdrop of COVID-19 crisis.


Indian Tax Authorities should acknowledge the practical challenges faced and take cognizance of changes in the business arrangements/ models due to the COVID-19 crisis and re-look at the agreed APAs. For instance, the transfer pricing models may need to be adjusted to come in line with any business motivated changes made to the global supply chain, and ensure they reflect any re-allocation of functions, assets, and risks across the group. Detailed guidance should be issued on the below aspects:

  1. New APA applications;
  2. APA applications in progress; and
  3. Existing APA (that are already concluded).

It is imperative for the Indian Tax Authorities to issue guidance that would outline the nitty-gritty for unilateral and bilateral APA in the aftermath of COVID-19.

1. PCG provide broad law administration guidance, addressing the practical implications of tax laws and outlining ATO’s administrative approach. These guidelines can provide taxpayers with additional certainty and compliance savings, and allow the ATO to direct their compliance resources to higher risk areas of the law.