The rapid global scale outbreak of the novel coronavirus (COVID-19) has taken the world by storm. This disease has transformed into a global pandemic disrupting lives, crumbling healthcare systems, crushing livelihood, dwindling financial markets, and devastating world economies alike in geometric progression.
While the immediate impact of the pandemic is known to mankind, this accelerating crisis has already engulfed the world economy by a temporary shutdown of industries, restricting the free-flow movement of goods, services, people, money. Operational closure of certain industries has brought the livelihood to a standstill, thereby causing even larger and deep-seated devastation.
COVID-19 is unlike a typical supply chain disruption since it has taken a global proportion and compelled companies to respond immediately to address the near- term sustainability of their existing businesses. One can easily witness a massive strain on MNEs' current operations as well as significant future risk and exposure from a business, tax, and legal perspective. With the above background, we have analyzed the impact of COVID-19 on tax strategies, in particular on transfer prices adopted by MNEs. Certain issues/critical business scenarios have been identified, which must be considered by the businesses, along with a way forward in which MNEs can deal with the same.
A Glimpse of COVID-19's Business Impact
COVID-19 has forced governments to take significant measures to protect their citizens and economies, which also includes measures to support employment, bringing about trade and tax relaxations, etc. to dampen the adverse effects of this pandemic on their ecosystem.
We expect to witness major business impact areas:
- A prolonged shut down of commercial operations;
- A drastic change in customer priorities and a resultant lack of demand;
- A disruption in the traditional distribution channel;
- Inventory obsolescence;
- A considerable reduction in people's productivity and
- Tightened cash flow and liquidity with a stretched working capital.
Consequent Impact on Transfer Pricing
In light of these new business realities, MNEs will need to address following transfer pricing considerations on an immediate basis
Existing Transfer Pricing structure will be under pressure
With lockdowns imposed by various countries, restrictions on the movement of people, hounding market pressure, and economic crisis emerging from the outbreak, MNEs would be forced to take drastic measures.
In such a scenario, MNEs may consider re-examining their global structures and functional profiles of entities, reallocating significant functions, risks, and assets to lesser affected jurisdictions and bring about business restructuring to mitigate the overall loss.
The transfer pricing impact of such business restructuring will need to be assessed and taken into consideration while realigning the transfer pricing structure.
Certain low-risk entities such as captive service providers within the group may continue to operate under the financial garb of the parent company. However, the support erstwhile provided to them may not be available in a situation where the group is struggling with limited means to keep the business running. Thus, it becomes important to evaluate whether a reduction in margins for such risk insulated entities in this unprecedented time, can be justified.
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