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Over the last few months, we have witnessed the profound impact of the COVID-19 outbreak on our day to day lives. The outbreak has led to imposition of lockdown across the globe which in turn restricted global economic activity. Economies and markets have been hit hard by the outbreak which resulted in businesses making desperate contingency plans to ensure their survival. Due to the sudden nature of the outbreak, we witnessed substantial shifts in the functioning of the economy and markets. The global supply and demand chain has also been adversely impacted by this outbreak and consequently, many multi-national enterprises (MNEs) have started to analyse the new supply-demand patterns for better management of production.[1] Additionally, MNEs which are known to have presence across the globe should also evaluate their existing transfer pricing policies and advance pricing agreements (APAs) in light of the changing business margins and landscapes.

The outbreak and the subsequent lockdowns led to the sealing of various international borders which severely disrupted the day to day proceedings of the MNEs. In addition to change in supply-demand patterns, companies were also faced with the problem of shortage of raw materials and labour. While some companies were able to restore their daily operations by adapting to the changes of the post COVID world, some companies had to scale down their operations or indefinitely shut shop.[2] In light of these drastic changes, entities engaged with transfer pricing regulations need to relook their APAs to avoid adverse tax issues at a later stage. The pandemic has resulted in change of economic factors which might have a bearing on the applicability of particular transfer pricing methods. Hence, the global economic impact of the COVID-19 calls for review and modification of existing APAs

According to the Organisation for Economic Co-operation and Development (OECD), an APA is “an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time”[3]. It is essentially an agreement between the tax payer and the tax authority to predetermine the applicability of a particular transfer pricing methodology. This methodology will be applied to all present and future international transactions of the said tax payer. Tax authorities will not disturb the transfer prices of the tax payer provided they follow the agreed methodology for calculating those prices.[4] Usually, MNEs enters into such agreements with the concerned tax authorities of various tax jurisdictions for a fixed period of time and the applicability of such transfer pricing methodology is contingent on the fulfilment of the terms and conditions of the APA. By predetermining the criteria for applying arm’s length principle to the future transactions, transfer pricing disputes can be prevented. Additionally, there is certainty with respect to the tax outcomes of the tax payer’s international transactions by agreeing to such arm’s length methodology in advance.[5] However, under the prevailing economic circumstances, an APA arrangement executed with tax authorities might be detrimental to its very purpose.

The APAs are usually executed after thorough examination of economic factors and circumstances at the time of negotiation. The underlying assumption is that a normal business environment along with the same economic conditions will continue to exist over the course of the arrangement. However, a worldwide virus outbreak could not have been predicted at the time of entering into such APAs and as a result, the critical assumptions made at the time of negotiation might not hold good under the present circumstances. Therefore, in light of the extraordinary economic crisis caused by the COVID-19 outbreak, MNEs and other business entities must look to renegotiate their APAs with the respective tax administrations to avoid unfavorable transfer pricing issues. In the event that such negotiation is unfruitful, the said MNEs should look to exit the arrangement. However, such exit strategy should only be used as a last resort. Further, the outbreak could also potentially impact the ongoing APA negotiations as the prevailing economic situation is much different from the one that existed at the time of filing the APA request.

In the recent years, APAs have been extremely instrumental in offering practical solutions to the transfer pricing issues. Many countries including India have now switched to APAs to reduce the transfer pricing disputes. In the wake of the pandemic, many businesses will now look to renegotiate these APAs with the respective tax authorities. But this process might not be as easy as it sounds because tax authorities are usually reluctant to reopen APAs once they have been negotiated. However, it is not often that the global economy is driven into a state of crisis and hence, tax authorities need to open themselves to the idea of renegotiation of APAs. Countries like U.S, U.K, Australia and New Zealand have already indicated that they will be providing assistance to businesses impacted by the pandemic that have active advance pricing arrangements.[6] History has categorically shown us that tax authorities of the aforementioned countries have been unwilling to make any modifications to negotiated APAs but the COVID-19 disruption is severe and warrants the reopening of APAs. Indian tax laws on the other hand, provide for revision and cancellation of APAs subject to the conditions stipulated under Rule 10Q and 10R of the Income Tax Rule, 1962.[7] On account of these rules, tax payers having arrangements with the Central Board of Direct Taxation (CBDT) can look to revise their APAs by engaging in fresh negotiations or they may also consider the prospect of cancelling the APAs altogether.

Tax authorities need to realise that the sudden need to reopen or cancel APAs is not due to a mere change in the business fortunes of the tax payers but due to a global pandemic that has taken the world by a storm. The ongoing events have made it clear that the pandemic is here to stay and hence, tax authorities must offer complete support to tax payers who are already bearing the brunt of the economic disruptions. The material changes in the economic conditions will certainly amount to breach of existing critical assumptions and validate the need for renegotiation of APAs. Hence, businesses having such arrangements with tax authorities should not hesitate to engage in a conversation with the government about the reopening of APAs. Moreover, it is entirely upon the tax payers to approach the government at the earliest as tax authorities might not be as understanding when the economy reemerges from the crisis. It is understood that the governments are already preoccupied with the task of tackling the pandemic related issues but the hardships being faced by the tax payers cannot be downplayed and there is an urgent need to renegotiate the APAs.

[1] Analysis of Impact of COVID-19 on Transfer Pricing. RSM Global, 27 Apr. 2020,

[2] Ibid

[3] OECD, “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations”, 2017, para. 4.134.

[4] Foley, Sean, et al. Advance Pricing Agreements And COVID-19. Tax Notes Federal, 25 May 2020,

[5] Advance Pricing Agreement Frequently Asked Questions. Deloitte, Sept. 2012,

[6] Ali, Hamza. “Pandemic Disruptions Could Throw Tax Agreements into Limbo”. Bloomberg Tax, 13 Apr. 2020,

[7] Advance Pricing Agreement Guidance with FAQs. Income Tax Department,

By – Venkat Varun Vinnakota (Final Year Law Student at Jindal Global Law School) 

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June 2024