Impact of Covid 19 on Transfer Pricing
The current COVID-19 outbreak has become one of the greatest threats to health, the global economy and financial markets in recent history.
At the current juncture, multinational companies and groups will have to work more and more efficiently to manage their supply chains in a rapidly changing environment due to the restrictions imposed by COVID-19. In most cases, this will require monitoring and documenting temporary changes due to the crisis; however, in other cases, the current situation may imply the definitive restructuring of operations and intercompany relationships within the Business Group in order to guarantee its future sustainability.
Some of the impacts companies will face this year include:
- Changes in supply chains;
- Changes in the value chain of multinational groups;
- Decrease in global income and profits in non-essential industries;
- Significant impact on the value of tangible and intangible assets;
- Impact on the productivity of companies; and
- Decrease in the cash flow of companies that belong to multinational groups and that operate in areas affected by the outbreak; among others.
In this context, the change in economic conditions, the change in business models and the aspects mentioned above will have consequences in terms of transfer prices for multinationals. Some of the most significant impacts are listed below.
- Changes in current transfer pricing policies that effectively reflect risk taking among members of the business group and adverse macroeconomic shocks.
- Changes in operating models to align with changes in the global supply chain. These changes include, for example, the temporary reassignment of commercial functions to limit the spread of COVID-19, the change in the headquarters of the Group’s administration as a consequence of travel restrictions or mobility of personnel, etc.
- Financial restructuring or new intercompany financing agreements. Existing intercompany loans may be restructured to reflect the new prevailing market interest rates or to extend the term of intercompany loans. Likewise, new intercompany financing agreements or agreements with third parties may arise with the aim of covering the immediate liquidity needs of the members of the business group. In this sense, it is important not only to consider compliance with the arm’s length principle of the terms and conditions applicable to financing, but also the fiscal impact of these agreements as a result of the new rules for limiting the deduction of interests applicable in Mexico and in other jurisdictions.
Contributing Advisors
