All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

The impact of TP policies on managing a company in crisis

AdobeStock_112478026_600 x 375

Companies need to take extra care when choosing their transfer pricing methodology and determining how to apply it, warn tax advisors from Valente Associati GEB Partners/Crowe Valente.

The Italian government, with Legislative Decree No. 14 on January 12 2019, approved the new Code of Business Crisis and Insolvency (the Code).

The novelties of this Decree are the tools and mechanisms included for warning and preventing the crisis. In this way, the Legislator has tried to comply with the guidelines expressed by the European Commission on a new approach to manage business failures and insolvency (2014/135/EU).

According to Article 13 of the Code, any income, equity or financial imbalances, in relation to the specific characteristics of the company and the entrepreneurial activity carried out by the company, are identified as “crisis indicators”, taking into account the date of incorporation and the start of the activity.

The connection with transfer pricing

The above mentioned imbalances, in companies belonging to multinational groups, could be caused by the application of incorrect transfer pricing policies, through which they could be generating significant reductions in the margins of companies operating in a specific sector.

Incorrect pricing applied to products or services provided between companies belonging to a multinational group may derive from either choosing the wrong transfer pricing methodology or incorrectly applying the chosen methodology.

In the first hypothesis, when the reduction of the margins of companies belonging to a multinational group can be traced back to choosing the wrong transfer pricing method, it is necessary to focus on two different lines of action:

  • In the first instance, it is necessary to carry out a functional analysis of the target company, taking into account a reassessment of the risks and the functions performed in a constantly evolving economic context; and

  • In the second instance, it is necessary to carry out a market analysis in relation to the main players in the sector, analysing their performance in a context of a preliminary market crisis, thus revealing the reduction or not of margins also for these companies.

In the second hypothesis, when the incorrect transfer pricing policies are due to the incorrect application of the chosen methodology, it is advisable to consider preparing a benchmark analysis, which should refer to the market considered to be in a state of crisis or which presents important warning signals.

This analysis should include an assessment of the companies identified as comparable to the tested party under consideration and ascertain whether, in the three years prior to the current year, they had already shown signs of crisis, through the use of the following ratios: income, equity and financial.

The preventive analysis of the state of crisis of a company belonging to a multinational group responds to a dual need:

  1. It allows a timely and effective restructuring of healthy companies facing financial difficulty, thus avoiding the repercussions of such difficulties on the entire group to which the company belongs; and

  2. Promotes an easier management of the internal market by reducing the barriers that characterise it and promoting greater investment in it.

In conclusion, it can be argued that, in light of recent regulatory changes, it is important that when analysing the transfer pricing policies adopted by multinational groups greater attention must be paid to any signs of crisis and, consequently, to take the necessary measures to prevent it.

This article was written by Sara Parillo and Carola Valente of Valente Associati GEB Partners/Crowe Valente.


Salvatore Mattia

Carola Valente
E: c.valente@crowevalente.it

 

Federico Vincenti

Sara Parillo
E: s.parillo@crowevalente.it

More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree