In a questionnaire issued to business group members, the OECD has called for taxpayers to explain the transfer pricing compliance challenges caused by the COVID-19 crisis and to identify any issues that require clearer guidance.
The OECD’s Working Party 6 (WP6) and Mutual Agreement Procedure Forum circulated the confidential questionnaire, dated June 3, to the national business groups and trade associations that comprise Business at OECD (BIAC). The brief questionnaire, which has been obtained by Tax Notes, calls for BIAC members to respond by June 17. The questionnaire emphasizes the OECD’s recognition of the need for greater guidance on specific issues caused by the COVID-19 crisis and intention to address the issues that respondents identify.
“It is important to note that WP6 and the MAP Forum are aware that COVID-19 will create a variety of different transfer pricing issues for different businesses. The purpose of this questionnaire is not simply to gather a list of issues, but to identify the issues that should be prioritized by WP6 and the MAP Forum,” the questionnaire says.
The questionnaire asks BIAC members to identify up to five transfer pricing issues related to the COVID-19 economic crisis that cause the greatest concern. It calls for respondents to further specify the issues that are most likely to cause disputes and the issues that are addressed with the least clarity in the OECD transfer pricing guidelines. The questionnaire also requests practical examples of challenges, as well as a general explanation of the effects of the COVID-19 crisis on the taxpayer’s business.
The document affirms the continued applicability of the OECD transfer pricing guidelines, but acknowledges the need for greater practical guidance regarding the application of the arm’s-length principle under current economic conditions.
“The COVID-19 pandemic is already, and will continue, to give rise to a unique economic environment to which there are few comparables in publicly available third-party data, making it difficult to apply transfer pricing rules,” the questionnaire says. “The OECD transfer pricing guidelines for multinational enterprises and tax administrations continues to represent internationally agreed principles and, irrespective of the underlying economic circumstances, provides guidance for the application of the arm’s-length principle, of which article 9 is the authoritative statement. However, members also recognize that in these challenging times it is incumbent on us to consider what additional tools could be provided for greater tax certainty and to mitigate the risks of future disputes between taxpayers and tax administrations.”
Recognizing the widely cited challenges associated with the lag in comparables data availability, the questionnaire calls for recommendations on the types of data that should be considered in comparability analyses performed for 2020. The questionnaire also asks BIAC members for suggestions regarding comparability adjustments, which some practitioners have argued may be necessary when testing routine entities — which are generally expected to earn a positive return — using the comparable profits method or transactional net margin method. Practitioners have suggested the flexible use of “down-economy” adjustments used for the 2008 and 2009 financial crisis years, in part to account for the potential for survivorship bias to distort the 2020 comparables data once they become available.