Speaking at the ITR US Transfer Pricing Forum in December, Andrew DeSimons, manager of transfer pricing at Withum, said that with TP being a “low-hanging fruit” for tax authorities, inter-company loans will be subjected to heavy scrutiny. This comes as tax authorities are working to recover financial losses incurred as a result of COVID-19.
Some jurisdictions have already seen a rise in TP audits, and taxpayers expect increasing inquiries from revenue authorities into their benchmark studies and permanent establishment exposures. Meanwhile in some Latin American countries COVID-19 has caused countries to step up reporting requirements under BEPS as they try to combat aggressive tax planning. The compliance burden on taxpayers is increasing across the board.
Panellists at ITR’s TP forum advised tax directors to remember that, while some revenue authorities have relaxed requirements during COVID-19, this will not last. “At the end of the day, the fundamentals of transfer pricing really have not changed… the logic behind it is still maintained,” said DeSimons. “Any changes, whether they’re drastic changes or small changes, have to be supported by facts; by the functions performed, by the risks incurred, and the assets employed”.
Some panellists were more optimistic that tax authorities would be lenient. “I personally think that the taxing authorities will be reasonable in accepting the profitability that was based on the benchmarks from the COVID-impacted period,” said Sadia Nazir, director of global transfer pricing at Clarios.
Nevertheless, tax teams need to prepare for the possibility of intense scrutiny to protect their businesses. In times of uncertainty, advice from tax professionals often focuses on comprehensive documentation and the COVID-19 pandemic is no exception.
“A couple of years from now, when you’re audited, it will be difficult to remember all the details,” said Nihan Mert-Beydilli, associate director of transfer pricing at NERA Economic Consulting. “I think keeping up the documents is the most important thing you can do to be prepared for the audit”.
Panellists at the ITR event advised against making any rash changes to TP arrangements unless tax directors are certain that they can be justified against changes arising from the pandemic.
Mert-Beydilli warned tax directors to “not be opportunistic in terms of making changes to their structures and policies just because COVID-19 happened” as these will be difficult to defend in the future. “Be cautious and make changes to the extent they are warranted,” she advised.
Marina Gentile, global transfer pricing lead at Withum, agreed, adding that if companies make changes in one direction, they should be prepared to reverse them. “The natural question is, okay, in times of economic downturn you’ve made this adjustment, but what happens on the flip side? Are you going to adjust in the other direction? I think it’s a bit of a slippery slope,” she said.
Ultimately, the overwhelming advice from tax professionals is to be sensible and make adjustments only when they are necessitated by real-world changes. Tax directors should not change anything unless they are confident that they can explain it to a tax inspector’s satisfaction.
Above all, tax teams should prioritise documentation so that, if and when audit season rolls around, every decision can be justified.
