How to Prepare Transfer Pricing Documentation in a COVID-19 World

May 2021

BY

Laurie DickerManaging Director, National Transfer Pricing Technical Leader

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One year into the COVID-19 global pandemic, the economic repercussions continue. But corporate taxpayers currently preparing their 2020 income tax returns face a more immediate concern: how to prepare transfer pricing documentation for fiscal year 2020 that adequately substantiates the impact of the disruptions wrought by the pandemic on their businesses.

The United States has not issued transfer pricing-specific guidance on how to address the COVID-19 implications, other than to reiterate that the U.S. transfer pricing regulations apply. Given this, one overarching principle should guide a taxpayer’s approach: prepare robust, up-to-date documentation that in many cases goes beyond what has been prepared for prior years. It is more important than ever that transfer pricing documentation be more than the bare minimum—it should include a strong narrative about how a taxpayer has responded to the economic conditions of 2020, both operationally and from a transfer pricing perspective.

Businesses should consider the following when preparing their 2020 transfer pricing documentation:
  • An analysis of the functions performed, assets owned and risks assumed by each entity in the taxpayer’s group—an important element of all transfer pricing documentation—is even more critical for 2020. If any of these elements have changed as a result of COVID-19, the taxpayer’s transfer pricing should be reexamined.
  • Most companies cannot rely on prior-year documentation for 2020 transfer pricing support due to the dramatic changes to the global economic landscape precipitated by the pandemic.
  • Finding comparables may be even more difficult for 2020, given that the pandemic has not affected all companies in the same way.
  • Waiting for a tax authority inquiry to develop documentation could prove risky, both because of the potential for the imposition of penalties and because it may become more difficult to obtain the relevant information for the tax years in question.
  • Tax authority scrutiny of transfer pricing arrangements, already on the rise before the pandemic, is likely to become even more assertive given the added budgetary pressure created by the increased government expenditures during the pandemic.

BDO’s Rethink - Transfer Pricing series provides more information on the effects of COVID-19 on transfer pricing issues.
 

How BDO can help

The pandemic has made transfer pricing, an already complex topic, even more challenging. Generating enhanced transfer pricing documentation for 2020 may create stress on already limited corporate tax department resources. But investing now in comprehensive transfer pricing documentation for 2020 returns will pay off by mitigating the risk of adjustments and penalties. BDO’s Transfer Pricing team can assist taxpayers by preparing or reviewing documentation to ensure it meets regulatory requirements. For more information, contact BDO.