OECD guidance about the transfer pricing implications of the Covid-19 pandemic

The OECD released its guidance on the transfer pricing implications of the Covid-19 pandemic on 18 December 2020.

This guidance was eagerly awaited by many MNEs whose statutory accounts will be closed by the end of the year, and which need to adjust their 2020 transfer pricing policies to reflect the financial impact  of the Covid-19 pandemic. While one can only praise the OECD effort to release its guidance in a relatively short period of time, one should not expect big surprises looking at it.

According to the OECD, the Covid-19 pandemic, because of its very nature, belongs to the hazard risk category, meaning that it is an adverse external event that may cause damages or losses. In turn, the materialisation of such an hazard risk led to the materialisation of other risks such as the market risk, and the operational risk or financial risk.

In its guidance, the OECD has focused on four priority issues: (i) comparability analysis; (ii) allocation of losses and Covid-19 related-costs; (iii) government assistance programmes; and (iv) Advance Pricing Arrangements (“APAs”). The organisation responds to companies’ transfer pricing matters through Q&A presentation.

This release will provide you with a first overview of the OECD guidance of December 2020.

 1. Transfer pricing guidance on comparability analysis

In this chapter, the OECD provides guidance to override the following issue: it may be impossible to determine the arm's length nature of a controlled transaction occurring in 2020 based on comparable companies’ 2017-2019 financial data, as they do not reflect the financial consequences of the Covid-19 crisis.

According to the OECD guidance, the first step would consist of estimating the effect of the pandemic on the controlled transactions by analysing several sources of information (e.g. evolution of sales volumes, quantifying the effect of government assistance, information from interim financial statements, macro and microeconomic information). Thus, companies are recommended to further analyse and document their economic situation before performing any comparability analysis.

The OECD appreciates that taxpayers may encounter difficulties in determining arm’s length conditions as a result of the lag in time between the occurrence of controlled transactions and the availability of information regarding contemporaneous uncontrolled transactions.

Bearing this in mind, the OECD has asked tax administrations to adopt a pragmatic approach to minimise disputes if evidence is shown that taxpayers will have made their best efforts to determine arm’s length prices in this unprecedented business context.

The pragmatic approach highlighted by the OECD is:

  • the use of reasonable commercial judgement supplemented by contemporaneous information to set a reasonable estimate of the arm’s length price;
  • an arm’s length outcome testing approach; and
  • the use of more than one transfer pricing method.

However, the use of data from other crises (one of the solutions proposed by transfer pricing experts), seems to be rejected by the organisation “given the unique and unprecedented nature of the Covid-19 pandemic and its effect on economic conditions”.

Moreover, the OCDE provides other practical guidance in term of the period of data used to evaluate arm’s length pricing, price adjustment and the utilisation of loss-making comparables. As an example, while the OECD explains that the use of multiple-year data and multiple-year averages for comparability analyses may have certain advantages in ordinary circumstances, it recognises that this would not be the case in this pandemic situation.

Thus, if divergent economic conditions in the pre-or post-pandemic period are evidenced, it may be appropriate to have separate testing periods for the duration of the pandemic, or for the period when certain material effects of the pandemic were most evident.

As a summary, taxpayers must quantitatively evaluate the effect of the Covid-19 pandemic on their business and on their controlled transactions in order to pragmatically adapt (if necessary) their comparability analysis.


2. Transfer pricing guidance on losses and allocation of Covid-19 specific costs

Due to the adverse economic conditions, low-risk distributors, manufacturers and service providers may suffer from losses if operating in an industry heavily impacted by the Covid-19 crisis.

To reply to this subject, the OECD recalls the importance of the functional analysis in any allocation of losses (in the present case) and allocation of exceptional/non-recurring costs. The OECD indicates that “First, it is important to emphasize that the allocation of risks between the parties to an arrangement affects how profits or losses resulting from the transaction are allocated at arm’s length through the pricing of the transaction. Second, it will be necessary to consider how exceptional, non-recurring operating costs arising as a result of COVID-19 should be allocated between associated parties.”

As already mentioned in Mazars webinars and previous articles, “low risk entities are not risk free”. The OECD, by using examples, illustrates this analysis. The OECD recalls that all “limited-risk” distributors do not bear the same risk. Where there is a significant decline in demand due to Covid-19, a “limited-risk” distributor that assumes some marketplace risk may, at arm’s length, face a loss related to the playing out of this risk. As a contrary, it will not be appropriate for a “limited-risk” distributor that does not assume a marketplace risk or another specific risk to bear a portion of the loss associated with the playing out of that very same risk.

Therefore, the OECD fully recognises that an entity with a low risk profile can face a loss if the analysis of the functional analysis is consistent with the loss situation.

Regarding exceptional and non-recurrent costs, the OECD applies the same methodology. Therefore, to determine which associated enterprise should bear exceptional costs, it would be first necessary to accurately delineate the controlled transaction, which would indicate who has the responsibility for performing activities related to the relevant costs and who assumes risks related to these activities. Several examples, cases are detailed in the guidance.

Regarding the renegotiation of intercompany agreements, related entities must act in the same manner as unrelated parties would do. Therefore, if economic circumstances, contractual clauses and legal frameworks allow for a renegotiation between unrelated parties, these offer the same possibility between related parties exposed to the same conditions (e.g. potential compensation for the renegotiation).

As a summary, taxpayers must, in their controlled transactions, act regarding their functional profiles and as unrelated parties would do.


3. Transfer pricing guidance on government assistance programmes

The OECD recognises that government assistance programmes may have an impact in several aspects of transfer pricing analysis. Indeed, the organisation highlights that terms and conditions of government assistance programmes related to Covid-19 need to be considered, and provides the first guidelines on how it should be considered in the analysis of controlled transactions, in the comparability analysis and in the analysis of the local market.

The first step in the study of such assistance is to determine if the latter should be considered as an economically relevant characteristic (i.e. if “the receipt of government assistance may have a direct impact on the controlled transaction and comparable transactions between independent parties, including their prices. In other situations, the receipt of government assistance may be less economically relevant.”). If so, the amount of potential effect of the receipt of government assistance on the pricing of a controlled transaction will depend on the economically relevant characteristics of the transaction.

Following the analysis, the taxpayers would be able to determine how to consider the assistance within its transfer pricing analysis (e.g. modification in the allocation of risks in a controlled transaction). For this matter, the OECD provides examples in order to determine how government assistance modifies the characteristics of a controlled transaction and details the transfer pricing implication.

Regarding the impact on the comparability analysis, the OECD acknowledges that the comparability of open market transactions or enterprises may be influenced by the receipt of government assistance, affecting both how the parties establish their commercial or financial relations and how they price their transactions. Therefore, when performing a comparability analysis, it may be necessary to take into account the receipt of government assistance when reviewing potential comparables. The OECD details the methodology to follow depending the method of comparability applied.

As a summary, taxpayers have to perform an exhaustive analysis in order to determine the impact of government assistance programmes on its operational business and on its market in order to adapt its transfer pricing analysis.


4. Advance pricing arrangements

Two situations are considered by the OCDE:

  • the impact on existing APAs and;
  • on those under negotiation.

The organisation reminds us that recommendations included in Chapter IV of the OECD Transfer Pricing Guidelines are fully relevant to respond to this matter.

In this context, to determine if taxpayers and tax administrations are bound by existing APAs, the OECD relies its guidance on the definition of a “breach of critical assumptions”.

 APAs generally include critical assumptions about the operational and economic conditions that will affect the transactions covered by the APA.

As long as, in certain business, the Covid-19 pandemic has dramatically affected the market, in others, only a mere change could be observed, therefore, the breach in a critical assumption must be analysed on a case-by-case basis. Once recognised, a breach of critical assumptions with the APA could have three potential outcomes (i.e. the revision, the cancellation or the revocation). The OECD details situations for which each outcome would be appropriate.

No matter the outcome of APAs, the OECD encourages taxpayers to early notify in order to give the affected parties more time to try to reach agreement on revising the APA, thereby reducing the likelihood of cancellation and document as much as possible the breach on the critical assumptions (a non-exhaustive list is provided).

For APAs under negotiation, the OECD encourages all parties to adopt a flexible and collaborative approach to determine how to take into account the current economic situation. The OECD also calls for taxpayers’ transparency through the disclosure of all relevant information concerning the impact of the Covid-19 pandemic on the covered transactions in a timely manner. The above-mentioned list of documents may serve as reference in this regard.

As a summary, an analysis of the critical assumptions of the existing APAs is important to perform in order to determine if the economic condition constitutes a breach. If so, the taxpayer has to collect and provide to the tax administration the relevant documentation in order to determine the appropriate outcome of the APA. Whether the APA is existing or under negotiation, transparency and communication with tax authorities is encouraged.


This OECD guidance is consistent with Mazars’ webinars, recommendations and publications released since April 2020.


Therefore, our key takeaways, published in October 2020, are still fully applicable:


Mazars’ view

Industry analysis

MNEs should document the impact of the Covid-19 crisis on their industry and market.

Documentation of the impact(s)

MNEs should compare the budgeted financial results to the actual results for each legal entity in the group. The impacts of Covid-19 and any other differences should be thoroughly documented.

Documentation of government aid

MNEs should document any government aid received and determine its treatment for transfer pricing purposes.

Functional analysis

MNEs should review the functional analysis section in their transfer pricing documentation and update it to address the effects of Covid-19, including which affiliate made decisions concerning Covid-19 risk management.

Contractual arrangements

MNEs should review and modify their intercompany agreements, if necessary, to address any changes to the facts and circumstances due to the Covid-19 crisis.

Transfer pricing adjustments

MNEs should assess the need for transfer pricing adjustments to their financial statements due to the Covid-19 crisis. If needed, these adjustments should be performed before 31/12/2020. Potential further adjustments may be considered in 2021, if necessary, once reliable comparable data becomes available.

Treatment of LREs

Limited risk entities in a stable market environment may not be regarded as LREs in a Covid-19 environment. Losses could conceptually arise therefore in these entities during Covid-19.

Mazars will further comment the OECD guidance in the coming weeks through new articles and webinars which will provide further clarity on these issues. We invite you to follow us. In the interim, do not hesitate to contact us should you have immediate questions.