Tax authority responses to losses and adjustments from the COVID-19 pandemic
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Tax authority responses to losses and adjustments from the COVID-19 pandemic

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Vrajesh Dutia of Deloitte India and Jennifer Breeze of Deloitte UK assess the complex arm’s-length decisions that global businesses had to make during the COVID-19 pandemic, and the various responses from international tax authorities.

During the COVID-19 pandemic, businesses faced significant uncertainty, and many were adversely impacted by supply chain constraints, revenue volatility, rising costs, border closures and the limited mobility of workforces.

For those multinational businesses facing a significant reduction in profits or generating losses, they had to determine the impact on arm’s-length pricing within the group whilst operating in that challenging environment. The decisions taken during the COVID-19 period are now subject to scrutiny from tax authorities in enquiries or have formed part of advance pricing agreement (APA) discussions.

This article focuses on tax authorities’ responses to losses and adjustments made because of the impact to businesses due to COVID-19. It firstly reflects on relevant guidance issued during and post-COVID and then considers some experiences faced by businesses dealing with tax authorities in APA processes and enquiries.

A key question faced by businesses that have group entities that manage relatively limited risks and, as a result, earn comparatively low stable margins, has been to what extent those entities should be impacted by reductions in business profits or generation of losses due to COVID-19. This is a topic worthy of a deeper dive, therefore whether losses can be supported at arm’s length specifically by distributors which manage and bear limited risks will be the focus of a separate article.

Guidance – a recap and reflections

As the pandemic started spreading globally in 2020, some tax authorities such as those in Australia, Singapore and the Netherlands, released an initial wave of additional guidance to businesses regarding the TP considerations of the impact on business due to the pandemic. This was followed at the end of 2020 by guidance from the OECD.

The OECD’s “Guidance on the TP implications of the COVID-19 pandemic” (the OECD COVID-19 Guidance) focused on how the arm’s-length principle and the OECD TP Guidelines apply to issues that could have arisen or been exacerbated by the pandemic. One of the four priority areas was the consideration of losses and the allocation of COVID-specific costs (with the other three being comparability analyses, government assistance programmes and APAs).

Fundamentally, the OECD COVID-19 Guidance was clear that the allocation of risks affects how profits or losses are determined at arm’s length, and the existing guidance on the analysis of risks in Chapter I of the OECD Guidelines was of relevance. This was due to the increase in the frequency and magnitude of losses, i.e., the overarching guidance was that the OECD Guidelines remained relevant and should not be deemed to be of no relevance simply because of the nature of the pandemic.

When considering adjustments, the OECD COVID-19 Guidance was also clear that careful consideration was needed for the commercial rationale for any change in the risks assumed by a party before and after the outbreak of COVID. Any new risk allocation needed to be supported by an analysis of all the facts with the documentation of the relevant evidence. Further, the accurate delineation of the intra-group transaction would determine whether any revision of intercompany agreements in response to the COVID pandemic was consistent with the behaviours of third parties in comparable circumstances. It is noted that independent parties may not hold another party to their contractual obligations, e.g., if a third-party distributor renegotiates payment terms on a temporary basis, this could form evidence for a business to justify revised terms in intra-group agreements in comparable situations.

Obtaining real time, publicly available information on the renegotiation of contract terms due to the pandemic was a challenge for many businesses. Further, due to the nature of the pandemic, it was difficult to obtain robust historical data that could be considered comparable. In practice, some businesses considered their own experiences dealing with third party customers and suppliers as part of the analysis of whether renegotiation of contract terms may be appropriate.

The guidance issued by other countries, even where this predated the OECD COVID-19 Guidance, typically followed a similar theme of reinforcing the arm’s-length principle and the need to accurately delineate the transactions and understand the risks managed and borne by parties. However, some countries did raise other considerations, for example:


The September 2020 guidance issued by Inland Revenue Authority of Singapore, included a specific concession to the Singapore TP rules and allowed a one-off concession for taxpayers to use multi-year testing if annual testing gave volatile results.


The July 2020 guidance issued by the Australian Taxation Office (ATO) issued brief guidance on COVID-19 economic impacts on TP arrangements. The ATO guidance introduced the concept of the ‘but-for’ analysis whereby the ATO would seek to understand the financial outcomes the taxpayer would have achieved ‘but-for’ the impact of COVID-19. This ‘but-for’ analysis was also reflected in the later OECD Guidance to use budgeted financial information to support the setting of arm’s-length prices.

The guidance issued by the OECD and tax authorities was welcomed by businesses but in practice, many businesses still faced considerable additional uncertainty when applying TP policies during 2020 and into 2021, and in some cases beyond. Those years are in many cases now potentially subject to enquiry by tax authorities.

APA considerations for COVID losses and adjustments

Where businesses had an existing APA, or were in negotiation for an APA, any potential adjustment to pricing due to COVID needed to be proactively addressed with the tax authorities.

The OECD COVID-19 Guidance did specifically consider APAs and noted that neither businesses nor tax authorities should automatically disregard or alter the terms of existing APAs due to the change in economic circumstances. However, where a business was significantly adversely impacted by COVID-19, in some cases it was concluded that where a breach of a critical assumption of the APA occurred this would lead to termination or renegotiation of the APA. Even where businesses concluded that no adjustment was needed, it was often necessary to justify that there was no breach of the critical assumptions which would terminate the APA as part of the APA compliance processes.

Examples of typical approaches taken by tax authorities regarding the COVID impact on the APA processes and outcomes include:


In Japan, APAs are available for transactions involving entities managing and bearing relatively limited risks. Based on specific circumstances, the tax authority has agreed to APAs involving reduced or zero-profit, but not typically losses, in the short-term for such entities.


In October 2020, the Malaysia tax authority issued a document addressing commonly raised questions on APA treatment due to the COVID-19 pandemic. This document stated businesses not significantly impacted by COVID could proceed with a new APA application. However, applications were temporarily paused for businesses significantly impacted by COVID given the uncertain outlook but are now potentially available again, depending on the facts of the case. Currently, for existing APAs which include COVID impacted years, the tax authorities have agreed that entities may earn less than median margins if it is within the range.


The Central Board of Direct Taxes (CBDT) in India has generally not accepted any COVID related adjustments for APAs involving entities managing and bearing relatively limited risks. As most APAs in India are related to service providers that are often not considered to assume economically significant risks which are borne by their related parties, the view of the CBDT during APA discussions has typically been that no adjustments are required in relation to transactions with such entities. However, if taxpayers can demonstrate a clear impact on profitability based on risks managed and borne by the taxpayer, then such cases could be considered differently by the CBDT.


The UK tax authority followed the OECD method and there was no blanket approach to determining whether critical assumptions were breached and a re-pricing of transactions was required. This was considered on a case-by-case basis. The statistics released by the UK tax authority do show a spike in the number of applications withdrawn by businesses during the 12 month period to 31 March 2021. This could be due to the uncertainty caused by the COVID-19 pandemic on businesses and their ability to commit to pricing up front for the term of an APA. APAs do typically lend themselves to periods of business stability.

Enquiry themes for COVID-19 losses and adjustments

Typical enquiry cycles differ by jurisdiction, but many jurisdictions are now enquiring into financial years taking place across the calendar years 2020 and 2021, with some into 2022. Significant fluctuations in profitability and business change typically increase the risk of an enquiry into a business’s TP arrangements. It may therefore be reasonable to expect that there will be more enquiries into these financial years, with a particular focus on whether businesses appropriately priced transactions and whether any adjustments to pricing made were at arm’s length.

It is too early to see a significant change in the quantum of enquiries being borne out in publicly available statistics. However, in cases where taxpayers adjusted pricing due to COVID-19, there may be greater scrutiny on the documented evidence available at the time on which it was determined that parties acting at arm’s length in those circumstances would seek to renegotiate prices.

Key takeaways for businesses

For businesses adversely impacted by the COVID-19 pandemic, they had to determine what adjustments, if any, were appropriate to make to intra-group pricing policies to consider the downturn in business profitability and changes to operations. Guidance issued by the OECD and individual tax authorities was clear that this needed to be determined with reference to the arm’s-length principle and whether parties at arm’s length would renegotiate pricing. Determining which entities should share in that downturn and to what extent was a complex area for businesses to evaluate and decide on the appropriate outcome.

In some cases, businesses have already had to proactively address these challenges with tax authorities in APAs. But now taxpayers are starting to see enquiry activity into the COVID years and, unsurprisingly, that adjustments to intra-group pricing for those businesses that faced decreased profitability is often a key focus.

What is clear, as with all TP, is that unsurprisingly this needs to be considered on a case-by-case basis. In APAs and in some enquiry outcomes for the COVID period that are already settled, there are examples of pricing adjustments and sharing of losses being accepted by tax authorities. Whilst in other cases, tax authorities consider no adjustments can be warranted, particularly where the local entity is considered to manage and bear limited risks. This can be a challenge for businesses, and contemporaneous evidence to support the decisions made by the business at the time, often in a period of significant turbulence, is key for businesses’ defence. It will be interesting to see how trends emerge as enquiries into the COVID impacted years continue to be opened and progressed.

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