The current crisis is likely to affect many businesses. The financial performance of the business may be impacted by a number of risks being realised, e.g. supply chain disruption, market risk, capacity risk, forex risk, credit risk, operational risk etc. As a result many businesses will have losses / extra costs in the system.
Disruption of this magnitude throws open significant transfer pricing (“TP”) questions as to how this disruption should be dealt with and whether TP policies and models need to be modified in order to be consistent with the arm’s length principle. This is particularly prevalent, for example, where limited risk models are involved. The question will arise whether the existing TP policies for limited risk entities (e.g. limited risk distributors or contract manufacturers) should be adjusted in light of the crisis such that there should be some degree of sharing of the exceptional financial pain that is being realised.
This update focuses on the scenario of limited risk models - in reality the TP consequences are wide reaching for broader models, e.g. fully fledged distribution/manufacturing, royalty policies, etc. Many of the considerations in terms of reviewing the position for limited risk models will also apply more broadly.
Is there a case for adjusting TP policies?
Whether there is a case for adjusting TP policies as a result of the crisis will depend on the functional, asset and risk profile of the relevant entities, industry, value chain, contracts and many other factors. The drivers and implications will be different for each multinational group. The key question to ask is what would happen in a comparable third party situation.