OECD releases guidance on COVID19 transfer pricing adjustments


Authored by RSM US LLP

On Dec. 18 2020, the OECD released guidance for multinational taxpayers and tax authorities that considers the impact of COVID-19 when making transfer pricing adjustments. Importantly, this provides both support and a framework for multinational taxpayers to proactively make adjustments to their 2020 transfer pricing arrangements and financial results where appropriate. In some cases, this may allow taxpayers to legitimately decrease their global tax expense for 2020 by using transfer pricing to reduce profit margins earned by either the parent company or its subsidiaries. The following insights address some scenarios where taxpayers should consider whether such transfer pricing adjustments could be beneficial and supportable.

The guidance reiterates its support for the arm’s length principle and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD guidelines), most recently updated in 2017. Notably, it states that any transfer pricing adjustments made by taxpayers should reflect arm’s length pricing in accordance with the OECD guidelines.

The guidance also outlines that tax authorities should respect best-effort attempts by a multinational taxpayer in making pragmatic COVID-19-related transfer pricing adjustments where the OECD guidelines have been followed. However, every country will assess the transfer pricing adjustments and consider whether these are in accordance with their respective transfer pricing laws and regulations. Some countries have provided specific guidance related to COVID-19 and its impact on transfer pricing.

Nevertheless, the guidance assists multinational enterprises with making, or at least considering, transfer pricing adjustments for 2020 if a multinational’s intercompany transactions have been impacted by the global pandemic.

The guidance considers whether such adjustments can be made retroactively in 2021 (that is, prior to the filing of the 2020 tax returns). Alternatively, the guidance considers whether a multinational’s transfer pricing arrangements could potentially be adjusted to account for the pandemic’s impact in 2020 and 2021.

There are four broad areas considered in the guidance:

  1. Comparability
  2. Losses and extraordinary expenses
  3. Government support
  4. Advance pricing agreements (APAs)

This article only focuses on the first two factors, as these warrant the most consideration in terms of potential transfer pricing adjustments to be made to 2020 financial results.

In regard to the third area, government support, to the extent a multinational’s financials have been impacted by government support received (either by the parent company or a subsidiary), this will need to be considered in the multinational’s 2020 transfer pricing documentation. Even where a company did not receive government support, analysis may be needed to assess whether any comparable company data included such government support. The guidance provides detailed commentary on this topic.

In regard to the fourth area, APAs, any company with an APA should read this guidance in detail and consider the impact of the pandemic on the APA.


Comparability is the key to supporting the notion that a multinational’s transfer pricing arrangements produce results consistent with the arm’s length principle, by comparing the intercompany transfer price to third-party or market data. Transfer pricing often uses comparable third-party profit ranges to determine or lend evidence that intercompany transactions are priced in compliance with the arm’s length principle. In many industries, these profit levels would be lower in 2020 than in prior years as a result of the pandemic. Of course, some industries have flourished or otherwise been able to weather the pandemic with minimal impact. Nevertheless, for businesses negatively impacted by the pandemic that use profit-based transfer pricing methods, there may be bandwidth to make adjustments in 2020 to reduce the profit levels achieved by the taxpayer in anticipation of comparable profit ranges being lower.

Consider a common arrangement whereby a U.S. parent has a foreign sales subsidiary that is characterized as a Limited Risk Distributor (LRD). A typical transfer pricing approach would be for the LRD to earn an operating profit margin similar to comparable LRDs in its geographic market.

Typically, an operating margin of 1%–5% may be expected based on the interquartile range of operating margins of comparable companies (this is an illustrative range; some industries or companies may have interquartile ranges that differ siginificantly from this example). In an industry significantly impacted by COVID-19, brick-and-mortar retail, for example, the operating profit margins of comparable companies may have been significantly impacted in 2020 such that the interquartile range of profit in 2020 may be considerably lower. Let’s say, for now, these comparable companies are expected to produce an interquartile range of -3%–1%. Continuing this example, imagine a multinational’s transfer pricing policy compensates its foreign LRD at a 3% operating margin. If the multinational’s business has been impacted by COVID-19, it would seem that reducing the LRD profit in 2020 from 3% to something lower than 1% (or breaking even or a loss) could be consistent with the arm’s length principle. The guidance, similar to the OECD guidelines, suggests that even LRDs may incur losses in certain markets depending upon the economic circumstances of the taxpayer and its industry. A global pandemic naturally is such an economic situation that must be considered.

Unfortunately for multinational taxpayers, it is not as straightforward as simply adjusting target profit levels downward. Comparable market data for 2020 is not yet available in the frequently consulted transfer pricing databases (as calendar year companies have not yet finalized their 2020 results). As such, it is difficult to know how the comparable profit ranges may have moved (or how much they will decrease). The guidance provides some sound analysis for companies to consider in the absence of comparable data, such as analyzing budgeted forecasts versus actual results, utilizing quarterly data from public companies as well as industry data, and even leveraging data from prior recessions. Collectively, these factors may allow for some quantitative adjustments to an interquartile range; such adjustments need to be considered on a case-by-case basis.

Moreover, factors such as intercompany agreements between parties and the allocation of risks must be carefully considered and documented. The guidance provides some useful detail and commentary regarding these matters. In particular, an intercompany agreement will be instructive, although in acting consistently with the arm’s length principle, an agreement may be able to be revised or amended similar to third-party renegotiations, or temporary arrangements, that may have occurred during the pandemic.

In sum, comparability adjustments can certainly be made, but careful analysis and documentation needs to be undertaken.

Losses and extraordinary expenses

For multinationals that incurred an operating loss in 2020, transfer pricing will have a large influence on which entity(ies) within the multinational group bear(s) that loss. In many transfer pricing arrangements, the parent company or entrepreneur of the multinational would assume the loss while other subsidiaries (such as cost-plus-service providers or LRDs) would earn a small level of routine profit. However, if the 2020 operating loss is either caused by or exacerbated by the COVID-19 pandemic, should the operating loss also be borne, or shared, by entities other than the parent company/entrepreneur?

As aforementioned, comparability may allow for certain entities within a multinational enterprise to earn a loss consistent with the arm’s length principle. Furthermore, consideration should be given as to whether any extraordinary COVID-19 expenses should be excluded from a transfer pricing analysis.

For example, assume an LRD incurs a 10% operating loss in 2020 due to a significant reduction in sales in light of COVID-19. If, after adjusting for the extraordinary expenses, the LRD makes a profit of 1% (and the 1% falls within an arm’s length range), then the LRD can reasonably be seen to have made an arm’s length profit even if it incurs a 10% loss. The challenge here for the taxpayer is how to identify and separate out the extraordinary COVID-19 expenses. The guidance contains some helpful commentary on this point.


Any multinational taxpayer with significant intercompany transactions should consider the impact of COVID-19 on transfer pricing and, in particular, whether any adjustments could, or should, be made to an entity’s intercompany pricing for 2020. Any transfer pricing adjustments resulting from COVID-19 should be made after a careful analysis of the facts and appropriate documentation, including the creation or revision of intercompany agreements where needed. The guidance provides taxpayers with helpful factors to consider and documents to best position themselves with any taxation authorities upon making such transfer pricing adjustments. Where the profit level of an entity is decreased as a result of making such a transfer pricing adjustment, it is always advisable to also consider relevant local country guidance.

As always, when making transfer pricing adjustments, indirect tax impacts such as customs, tariffs, withholding tax and value added tax, in tandem with local country tax laws, must be considered.

At RSM, we understand. Whatever your industry, wherever you operate, we have the experience and resources to help you plan, implement and maintain proactive transfer pricing strategies that take full advantage of planning opportunities and mitigate compliance risks.