By Tommaso Fonti, LL.M. and Dott. Denis AmiciInternational Taxation Department

The Covid-19 emergency will have an impact on the performance of multinational corporate groups (MNE groups) and, consequently, on economic analyzes aimed at verifying the compliance of transfer prices with free market values.

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In the current climate of general uncertainty, MNE groups will have to carefully consider whether it is appropriate/necessary to revise transfer pricing policies, in particular whether to renegotiate intra-group prices with foreign affiliates and how to allocate losses or extra profits resulting from the Covid-19 crisis among group companies.

Normally, in intra-group transactions, losses and extra-profits are allocated to the group company that performs value-added functions and bears the higher risks, but the current crisis situation is so extraordinary and has such an impact on the entire value chain that is necessary to carefully consider whether and how to revise this general approach.

MNE groups should assess the impact of coronavirus on transfer pricing policies in order to decide:

1) whether to renegotiate the terms and conditions of the contractual relationships currently in place with its foreign subsidiaries, in the light of the conduct adopted in comparable transactions with third and independent parties (customers or suppliers);

2) whether and what corrections should be applied to the benchmark analyses that will be carried out through the appropriate databases in 2021, with reference to the tax year 2020.

In this regard, MNE groups can in particular assess whether:

  • to select only third-party and independent companies that have had a decrease in revenues equivalent or similar to that suffered by the group company to be tested (so called tested party); or
  • to include loss-making companies in the search for comparable companies; or else
  • to select the lower margins ​​within the arm’s length interquartile range (e.g. the first quartile rather than the median).

Regardless of the solution adopted, it is of utmost importance that companies immediately prepare the appropriate supporting documentation to justify the choice made in 2020, given that the possible tax audits by the Financial Administration will take place years later.

The Firm remains available to assess with the company whether and how to formalize changes to the group’s transfer pricing policies.