COVID-19 economic impacts on transfer pricing arrangements
This information aims to assist businesses economically affected by COVID-19 when preparing documentation on the arm’s length nature of their transfer pricing arrangements.
It does not address whether related party arrangements that have been terminated, amended or replaced due to COVID-19, would satisfy arm’s length conditions. If you are considering such changes to these arrangements, we encourage you to engage with us as early as possible.
How we assess the economic impacts of COVID-19 on transfer pricing arrangements
The effects of COVID-19 on the Australian economy are not yet known or quantifiable and the impacts on specific industries and businesses will vary widely. We acknowledge that some businesses will be negatively affected by COVID-19, which may lead to a reduction in revenues, increased expenses, and changes to profit outcomes.
When undertaking transfer pricing compliance activities, we seek to understand the facts and the individual circumstances by assessing:
- the function, asset and risk profile of the Australian entity before and after COVID-19
- the economic circumstances, where the actual economic impacts of COVID-19 on the Australian operations should be outlined and evidenced – this may include a broader analysis of how the relevant industry has been affected
- the contractual arrangements between the Australian entity and its related parties, and if any obligations or material terms and conditions have been varied, amended or terminated
- evidence of the impact (if any) of COVID-19 on the specific product and service offerings of the Australian entity and how this has affected the financial results
- evidence of changes in business strategies as a result of COVID-19, including decisions made, outcomes sought and actions taken to give effect to those strategies.
Emphasis will be placed on gathering evidence to support any changes to, or impacts on, the business as a result of COVID-19. You should consider documenting these changes as they are considered and implemented.
How to support the arm’s length nature of your transfer pricing outcomes
Analyses of comparable company benchmarking may not reliably support arm’s length outcomes of continuing transfer pricing arrangements where they are impacted by COVID-19, particularly in the short term.
On this basis, we will seek to understand the financial outcomes you would have achieved ‘but for’ the impact of COVID-19. This analysis may include:
- a detailed profit and loss analysis showing changes in revenue and expenses, with an explanation for variances resulting from COVID-19 – this may include a variance analysis of budgeted (pre-COVID) versus actual results
- details of profitability adjusted to where your outcome would have been if COVID-19 had not occurred – this should consider all factors that have a positive or negative impact on your profits and should be supported by evidence
- the rationale and evidence for any increased allocation of costs or a reduction of sales (and subsequent changes in operating margins) to the Australian entity, taking into consideration its function, asset and risk profile
- evidence of any government assistance provided or affecting the Australian operations.
PCG 2019/1 and COVID-19 impacts
We are not currently seeking to review PCG 2019/1 due to the effect of COVID-19. We consider the appropriateness of PCGs where analysis or further benchmarking indicates there is a material movement in the information used to develop the risk assessment framework.
Breaching an APA due to COVID-19
We understand that your business may be negatively affected by COVID-19.
For taxpayers with an advance pricing arrangement (APA) in place, this could potentially result in a breach of the critical assumptions in the APA. In those circumstances, we encourage you to proactively engage with us as soon as you become aware that a breach of the APA terms has occurred or is likely to occur. See How to support the arm’s length nature of your transfer pricing outcomes for examples of areas of enquiry we may consider.
We will seek to understand the impact of the breach on the APA and consider appropriate outcomes. This could include:
- business as usual
- renegotiating the APA over the time period of the demonstrable impact
- suspending or modifying the APA for a set period.
Those currently in an APA process without an agreed APA
If you are currently engaged with us in the APA process but don't have an agreed APA in place, we will continue to honour our commitment to work with you on your application. Standard APA processes and analyses apply where your economic performance is not significantly affected by COVID-19.
If you are significantly affected by COVID-19, it may be difficult to progress the APA application without objective evidence of any impact experienced or high uncertainty around potential outcomes.
In these cases, we'll discuss placing cases on hold or consider whether the APA process can be mutually ended. You can then lodge an APA application when you have a greater level of certainty on the impact.
Bilateral APAs will need to be considered in consultation with the corresponding jurisdictions.
If you have questions or require assistance, email us at International@ato.gov.au. Alternatively, if you have a dedicated key relationship manager, you can contact them directly for assistance.
Information about the economic impacts of COVID-19 on transfer pricing arrangements.