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The COVID-19 pandemic is expected to have an impact on a multinational group’s operations and consequentially on their transfer pricing arrangements / transfer pricing results.
The IRAS recently issued a set of guidelines that enable tax-payers flexibility in defending their transfer pricing arrangements where their business operations / financial positions have been impacted by Covid-19.
The guidelines recommend that taxpayers, whose transfer pricing arrangements have been impacted by Covid-19, could include the following information in their transfer pricing documentation reports:
The IRAS has also introduced the “term testing” approach to analyse the appropriateness of the tax-payers transfer pricing arrangements. The said approach is used to test multiple year average results of the taxpayer / taxpayer’s affiliate (instead of single year testing) with a view to eliminate the impact of an extraordinary event (i.e. COVID-19 for Year of Assessment 2021). In this regard, the guidelines provide as follows:
To avoid potential disputes, taxpayers should consider the impact on the related parties in other jurisdictions in relation to term testing.
The IRAS guidance also provides useful inputs to taxpayers as regards APA related matters. These include:
For existing APAs, consideration should also be given whether there is any breach of the critical assumptions and agreed terms and conditions.
In gist
These are extremely welcome guidelines issued by the IRAS that allow taxpayers significant flexibility in defending their transfer pricing arrangements in times where operations may have been adversely impacted by Covid-19. Companies facing operational and financial issues on account of COVID-19 should document these implications on a real time basis as well as ensure that their transfer pricing documentation reports are robust enough to demonstrate the impact of Covid-19 on their operations.