The coronavirus pandemic is creating high levels of transfer pricing risk for multinational groups. Commonly used profit-based methods (e.g., Comparable Profits Method (CPM)) essentially force profit on some group members at the expense of others. Taxpayers that fail to report “arm’s length profit,” based on their established transfer pricing methods, risk exposure to adjustment, additional taxes, penalties and interest.
It’s a data lag problem
Typically, “arm’s length profit” is determined based on the last three years of third-party comparable company data, which is published in various databases. The problem is that 2020 loss data won’t be available until mid-2021—too late to be useful in setting and managing transfer prices now. Post-2020 year-end “true-up” adjustments aren’t the answer because they aren’t permitted in many countries, and they create havoc with VAT and customs duties compliance.
But wait, it gets worse—the GILTI whipsaw
To make matters worse, U.S. multinationals reporting U.S. losses and foreign profits will confront the GILTI whipsaw. Foreign profits will be subject to U.S. tax under the GILTI regime without the benefit of deductions and credits to alleviate double taxation. Taxpayers hoping to monetize 2020 U.S. losses with carry-back refund claims under the CARES Act, will find their loss carry-backs reduced dollar-for-dollar by GILTI.
How can RSM help?
The impact of the coronavirus epidemic will undoubtedly create a lasting economic impact. However well-managed companies that proactively revisit and review their transfer pricing policies now will still discover tax planning opportunities. Following are planning opportunities to consider when looking at businesses’ critical recovery priorities:
- Loss planning: There is an opportunity to optimize a multinational group’s effective group tax rate with loss utilization strategies between the loss-making and profitable companies. This requires careful and proactive planning to revisit traditional transfer pricing policies in light of the current economic downturn.
- Customs and duties: To the extent subsidiaries have guaranteed returns (i.e., target margins), and COVID-19 results in year-end transfer pricing adjustments, an opportunity to recover customs/duties paid will exist in some jurisdictions. This opportunity will be most prevalent for tangible good importers and resellers.
- Contemporaneous documentation: Given the impact COVID-19 will have on many multinational groups’ operating results, companies may need to revisit transfer pricing policies in order to support loss positions in previously profitable subsidiaries, or adopt temporary transfer pricing strategies. It will be critical that any such strategies or revisions are contemporaneously documented and supported with economic data.
At RSM, we understand. We’ve been helping companies like yours manage their transfer pricing concerns in markets around the world for decades. Whatever your industry, wherever you operate, we have the experience and resources to help you plan, implement and maintain proactive transfer pricing strategies that take full advantage of planning opportunities and mitigate compliance risks.
Our dedicated team of COVID-19 transfer pricing specialists has undertaken detailed research and analysis in order to create a framework, supported by economic data, to assist companies in proactively addressing the transfer pricing impact of this economic downturn. If you’ve got questions we are here, ready to talk, and help you and your organization. Contact us today.
