Corporate Tax Planning: Impact of COVID-19 and Transfer Pricing: Approaches for Comparability Adjustments

The impact of the COVID-19 pandemic has varied significantly across market sectors and companies, and the disruptions generated by the pandemic have had major implications for the transfer-pricing practices of many multinationals. The COVID-19 crisis has challenged the efficiency of traditional benchmarking of profit margins and markups on the basis of the profitability of comparable companies. In this article, we provide a framework for addressing two key questions: (1) how to ensure that the data used for setting or testing transfer-pricing results are appropriate in terms of comparability and that they adequately reflect economic reality for the tested party; and (2) what adjustments need to be made if the tested party's results fall below the arm's-length range. Given the extraordinary circumstances, we cannot rely on a simple analysis of historical data to adjust for the impact faced by businesses as a result of COVID-19. For example, in situations where the taxpayer's results have been affected by the COVID-19 pandemic to a greater extent than the results of comparable companies, the approaches outlined in this article will provide the taxpayer with an estimated arm's-length range of profitability for the comparable companies that is calibrated to the impact of the pandemic on the tested party's results. These approaches are aligned with the transfer-pricing guidance for COVID-19 adjustments issued by the Organisation for Economic Co-operation and Development in December 2020.