Regarding transfer pricing, when it comes to analyzing comparables, the vast majority of analysts rely on the comparative evaluation of the returns of a controlled entity versus the returns of comparable entities.

In this economic crisis caused by COVID, the above is a serious problem, which is worth taking into account, since if the performance of a “controlled” is miserable, it is likely that it will fall into the error that its ‘comparable’ They are far from reality and induce a transfer price adjustment, which would bring with it serious fines from the authorities and high cost economic losses for the “tested party” .

That is why, from this humble space, I try to make an analysis and recommendations, which in my opinion, I consider appropriate.


First, all companies tested must start documenting their operations as soon as possible and begin to create their “defense of the case . ” On the other hand, it should also be taken into account that the “economic analysis” can be strengthened with certain valid techniques, for example:

  • The comparability can be strengthened by adjusting the financial results of the controlled company, through projections prior to the recession or interim results (partial of the current year, where it was not affected by COVID).
  • On the contrary, it is also possible to adjust the financial results of the comparables corresponding to the previous year, to emulate how this crisis would have affected them, either based on the manifest cause in the controlled entity or using statistical models.

Likewise, it is always important to rethink questions about the underlying data, for example:

  • Low or high financial interest rates on loans , as the case may be. Since these, they can rethink the entire inter company loan structure.
  • The devaluation of assets , such as fixed assets or their revaluation, as in the case of pharmaceutical patents. The foregoing already supposes issues or edges that must be validated, especially whenit comes to captive insurance .
  • Dissemination of risk among related parties , for example, the distribution of losses. The foregoing is very important to validate in those jurisdictions that allow the assumption of cross-border losses .

With a global pandemic, it is normal that we all have primary interests, for example: health and personal and family finances. However, everything will have an end and that is where we must have a roadmap already drawn up, because as a tax professional and tax planner , it is normal that you see everything with long lights and as planned as possible. This being the case, it is that I consider that in terms of transfer pricing it is necessary to begin, from now on, to draw up plans that allow a less tortuous and painful path, which can even put any company in a safe harbor , against its competition that does not planned a timely transfer pricing strategy in times of COVID.

Among the first consequences of COVID that can be seen, is the implementation of unplanned transactions, such as:

  • We loan inter company . In this scenario it is important to have fully identified the impact of the correct interest rate to be used. Where we can already validate various questions, for example: The libor rate, is it a correct indicator? It should be seen that, with its announced disuse in 2022, it could join the problem of the crisis, which will impact economically for more than a couple years in the future. This must be validated by your transfer pricing analyst, who can now save you headaches with subsequent accounting adjustments, which only mess up the transfer pricing report, reducing credibility with the tax regulator.
  • Regarding the flow of goods and services . It is worth considering how they should be valued in the face of an economy of scale, which is expected.
  • The home office . This can, in some issues that are more than deep and casuistic, especially in the European community, generate questions about permanent establishments, as well as indications in the allocation of income by the location of the related companies, since part of their direct costs are reduced.

The above is not shamanic magic and it does not represent something serious, but due to the large amount of documentation that may be required and especially the inter-company agreements that must be applied, it is important to start documenting as soon as possible.

It should also be taken into account that the flow of transactions can be seriously affected, since they can diminish or mutate (what used to be done in one way is now done in another) and therefore leave any known comparable range.

It is important to bear in mind that at least in the transactional net margin method (TNMM) , which is the one most used for companies that are based in countries where their transfer pricing regulations are in accordance with the guidelines of the OECD or the comparable earnings method (CPM) if they have any headquarters in the United States, the first latent problem may arise; The Temporality of Comparables .

As many of us know, practice guides the vast majority of companies at the end of the fiscal year, proceed to carry out a transfer pricing study, concatenated with the annual IR (or ISR) declaration. Although, it is also true that during the fiscal year some adjustments may or may not be made, these are based on the analysis of the previous year. However, it is a common factor that the profitability of the “tested party” is compared with the profitability of comparable companies, which are taken from the previous year’s data, because the current ones are not immediately available.


“A company A, can have potentially comparable companies, with data at hand from 2016 to 2019, because 2020 is not available . 

In the previous assumption there is nothing wrong and it is valid and accepted to use these years of comparable companies, at most 3 to 5 years ago, although this can sometimes become a problem, as they may have omitted some particularity of industry, such as, for example; “The Prohibition Law” of zero liquor sales (for liquor companies), which many countries can apply in periods of elections or social upheavals.

The previous particularity will make the indicators of a linear graph tremble more than a polygraph in an examination of a politician, thus lacking any credibility. The above will only disappear once this economic situation improves and the 2020 company data is published.

As a prudent professional, the ideal would be that you anticipate this challenge and that you begin to carry out the task that we previously indicated: prepare the “defense of the case” , proceed to carry out a transactional and / or documentary back up that reveals all the disparity between what the company had planned and what was obtained.

To do this – prepare the defense of the case – you must ensure a preliminary of the first quarter of the year, to determine the profitability before the COVID, as well as the financial projections, duly supported and not utopian. Then, despite the supervisory power of the tax administrations, it is important to be clear that this defense strategy may undermine any attempt to adjust transfer prices, under the premise that the result has been caused by an extraordinary circumstance and not by an unjustified off-market price. Well, what will be done is to take a projected result and compare it against the history of the comparable ones, such as if COVID were not a problem. With this we try to guarantee that the transfer pricing report supports that the entity would have been within the range of comparables, if the pandemic had not taken it off course. Of course, it is important to be clear that projections are not the same as actual results, but at least this approach gives the taxpayer some position to defend.

On the other hand, it is well known to all that, when it comes to transfer pricing, it is common to allow taxpayers to make adjustments to financial data if the adjustments improve the reliability of the benchmarking. Indeed, presenting a study based on the previous assumption is a means of adjusting the financial data of the tested party to eliminate the effect of the recession caused by the pandemic. On the other hand, an additional attempt could be made to adjust the financial data of comparable companies as if the latter had gone through the pandemic and present IR (or ISR) returns in that way.

In conversations with some other experienced on the subject, we always reach the inflection point of asking ourselves a question: Can the tax authority really ignore these adjustments to the comparables or to the same tested party ? The answer is more than obvious, of course it is! Beyond an arbitrary act, it is important to note that the tax authority can make its own adjustments. Well, let’s remember that the study itself is based on an assumption of how those comparable companies would have behaved without the recession, because their projections or information during the pandemic would not currently be available.

Equally, it is worth validating that a viable alternative would be to shift the entire benchmarking range down by adjusting the financial results of comparables. If we reason that the effect at the industry level, or rather at a comparable level, because they could be from multiple industries, is uniform, then perhaps we could adjust the profitability measure of each company by the same number of percentage points, for example, and that, in turn, could be based on what happened to the “tested party” .

So, for example, if the tested party’s operating margin was reduced by four percentage points, we could reduce each of the comparable company’s operating margins by four percentage points. While arguably crude, at least this has the merit of normalizing for the recession. At the same time, however, it masks the effect of proven part-specific factors which could, of course, include incorrect transfer pricing.

Conversing with an excellent friend, who fascinates me to listen to his numerical and economic dissertations, he explained to me what in the opinion of this lawyer would be a more exquisite treatment, which consists of the use of econometric regression analysis to be able to quantify how the movements in the Sales affect profitability, hence everything else is the same. It would then extrapolate how that factor would affect the profitability of the tested party and comparable companies, because each would likely have experienced different changes in sales. One would expect the sales cuts to better explain any drop in profitability in the next year or so.

At the same time, for me I could not agree more with the previous approach, since a regression analysis could take into account other price factors that are not transfer, such as high costs due to bottlenecks in the supply chain (customs delays, border closures, maritime transport or similar) or the alternative supply of raw materials or finished products. These approaches have already been implemented previously in many reports and audits of transfer pricing documentation, such as can be observed in many judgments that in the matter of Transfer Pricing or International Taxation, the European Community has indicated, especially since tax authorities may be hard-pressed to present their own counter-analyzes.

Now I also consider it extremely important to be able to consider whether the underlying assumptions about transfer pricing agreements still remain unchanged. For example, in the past, it could be assumed that some related parties have limited risks and therefore deserve a guaranteed range of profitability, while other related parties are more risky and enterprising and therefore should bear the impact. total fluctuations in earnings. However, in times of COVID, it is valid to say that everything has changed and try to assume that all parties involved in a transaction must take some risk. But, this could in some cases be considered a deviation from the CPM / TNMM methods and closer to the residual profit division method. Since,

Smaller entities, with a quasi-zero control over their management with less capacity to take risks, should be assigned a smaller part of the residual profit or loss. However, they would be participants in that exchange and therefore could end up with an overall loss if their residual loss eats away the profits from routine activities. Tax administrations globally have long accepted this method, but it depends on preparing a robust functional analysis that explains why all related parties are, to a greater or lesser extent, risk takers, even if they are only evident in the context of extreme operating circumstances.

This functional analysis would allow any other CPM / TNMM approach to transfer pricing to be aligned. In the same vein, inter-company agreements should reflect this distribution of risk in extraordinary circumstances, in the same way that third parties could renegotiate a contract if one of the parties experiences unexpected challenges. Although it may sound obvious, but any addenda or contractual modification should be done now and now, rather than after the end of the fiscal year.

We are more than clear that things will get very challenging to be able to defend transfer pricing results in the coming years, where only an avid and experienced expert or group of experts in the field can be the best option for companies, too. There are many opportunities that can be taken advantage of, such as interest rates.

As there is a recession, banks will be under more pressure to place future loans to improve profitability, this translates into “lower interest rates.” That is why any multinational can take advantage of the opportunity to grant credits, refinance or restructure its subsidiaries, being able to generate optimal tax shields, with future effects. In the other sense, with the recession all the IP suffers some devaluation, this allows to begin to structure a migration to a structure of IP management, without suffering great attacks of capital gains, since prices can even justify even losses of capital in IR (or ISR).

Currently, this is very trite, but it is valid: “There is blood in the streets and that is when you must take advantage of the opportunities.” It is a good time to start preparing or documenting operations to avoid future adjustments, it is a good time to do tax planning both at the captive insurance or asset level .

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April 2021