Menu
Tax Notes logo

Greece Follows OECD With COVID-Related Transfer Pricing Guidance

Posted on Mar. 16, 2021

The Greek tax administration has addressed some of the transfer pricing challenges posed by the COVID-19 pandemic with new guidelines that draw heavily on the OECD’s recent guidance on the subject.

In its March 10 guidelines on the effects of the pandemic on transfer pricing, Greece’s directorate-general of tax administration issued formal guidance on the subjects highlighted by the OECD’s December 2020 guidance note. Like the OECD guidance, the Greek tax agency’s guidelines address challenges regarding the availability of relevant comparables data, the allocation of losses and pandemic-related costs among group members, the treatment of government assistance, and the pandemic’s effect on advance pricing agreements. The Greek guidelines, which specify that they are to be interpreted in line with the OECD guidance note, also echo the OECD’s general emphasis on documentation and risk allocation.

Regarding the Greek tax agency’s tolerance of losses by limited-risk entities, which in normal circumstances are expected to earn a steady profit, the guidelines note that a loss may be appropriate if the entity can adequately document and establish that it bore the risks responsible for the loss. “A ‘limited-risk’ distributor may, for example, suffer losses if it assumes market risk (a fall in demand), and the revenue it generates is insufficient to cover its fixed costs. In this case, and in accordance with the OECD transfer pricing guidelines, the taxpayer must document (e.g., by examining gross profit using the resale-price method) that the losses are indeed due to reduced demand,” the guidelines say.

Similarly, the Greek guidelines recognize that the retention of loss-making comparables — a practice that the OECD guidelines do not rule out — in a transactional net margin method comparables set may be appropriate. Although the OECD guidelines do not cite losses as a basis for excluding a potential comparable, loss-making companies are in practice routinely excluded from transactional net margin method comparables sets.

“The inclusion of these loss-making companies in the final set of comparables is not prohibited by definition, especially in times of significant economic stress due to the pandemic,” the guidelines say. “Therefore, when conducting a comparability analysis, it may be appropriate to include loss-making comparable companies in the final set of comparables, provided that, based on an accurate delineation of the transactions under consideration and the entity’s functional and risk profile, these companies are indeed comparable.”

The guidelines cast doubt on the reliability of comparables data from the Great Recession, noting that “the use of information from previous economic crises (e.g., 2008-2009) is not recommended, as the crisis due to the pandemic differs in its scale and characteristics, and mainly affects different economic sectors.” The Greek tax agency’s stance is consistent with the OECD’s guidance, which notes significant concerns regarding the use of Great Recession data.

According to the guidelines, the allocation of pandemic-related costs characterized as extraordinary expenses must follow the allocation of risk among the parties. However, the guidelines add that Greece’s tax agency — like tax agencies elsewhere — does not regard all pandemic-related costs as extraordinary expenses.

“Some operating expenses may not be considered as extraordinary in cases where they are related to long-term or permanent changes in the way businesses operate. In particular, some teleworking-related expenses may be permanent if remote work became more frequent as a result of the pandemic,” the guidelines say. “If the expenses are not extraordinary, but reflect the business’s mode of operation, then they should be treated as such when delineating the relevant transaction and performing a comparables analysis.”

The guidelines also note that pandemic-related government assistance must be accounted for in the functional analysis and can affect the allocation of risk among the parties.

According to the guidelines, taxpayers that wish to alter or terminate their intercompany contractual arrangements, including through the invocation of force majeure clauses, will face a fairly high bar in attempting to justify those changes. Beyond carefully documenting the basis for the change, taxpayers will have to establish that the changes would have been made by unrelated parties, the guidelines say.

“In the absence of clear evidence that independent parties in comparable circumstances would have revised their agreements or trade relations, the modification of related parties’ existing contracts or trade relations is not in line with the arm’s-length principle,” the guidelines say. “Furthermore, it must be sufficiently substantiated that the magnitude of the disruption caused by the pandemic in the relevant sector creates a situation that can be characterized as force majeure.”

Consistent with the OECD’s guidance note and statements by officials from other countries, the Greek guidelines also emphasize that executed APAs remain in force unless and until a critical assumption is breached. They add that a breach will not be automatically assumed. “As not all businesses have been affected to the same degree and in the same way by the pandemic, whether there is a failure of the critical assumptions of an APA should be considered on a case-by-case basis, at the initiative of taxpayers and always in consultation with the relevant department,” the guidelines say.

Copy RID