Transfer pricing: A compliance obligation or an important management tool in Covid-19 pandemic’s times?

Transfer pricing: A compliance obligation or an important management tool in Covid-19 pandemic’s times?

15 July 2020


Currently, Multinational Economic Groups (MNEs) are facing an unprecedented complexity and uncertainty environment, due not only to the effects of globalization, but also and, especially, due to the continuous changes in business models, justified by several internal and external factors, such as competitiveness, efficiency pressure, continued scrutiny by tax authorities around the word, increasing transparency and regulatory the Covid-19 pandemic, among others.

As a result, the transfer pricing issues have been, and will certainly continue to be, one of the main tax hot topics in global tax matters.

FY 2019 and related tax compliance obligations

After a period of global lockdown, MNEs are currently in the process or have already closed accounts for FY 2019, as in most jurisdictions this process was legally postponed a few months (depending on the countries, one to three months).

As you know, the transfer pricing rules (namely the Portuguese ones) should always be considered when determining the taxable profit for Corporate Income Tax (CIT) purposes, otherwise the corresponding tax adjustments must be made by taxpayers. This exercise will be carried out in a first phase for the purpose of estimating CIT (before the closure of the accounts) and, in a subsequent phase, for the purpose of submitting the annual CIT declaration, this year also postponed (depending on the jurisdiction).

Once the accounts are closed, the taxpayers have to prepare the remaining reporting and documentation obligations, namely from a transfer pricing perspective, since these must be fulfilled in Portugal by the date of the submission of the Simplified Business Information / Annual Declaration (in Portugal), this year postponed until August 7th.

Although it may have remained unnoticed by a large majority of taxpayers (although released since February 2019), these reporting obligations (namely annexes A and H) have substantially increased, becoming even more demanding and wide.

By one hand, some charts in annex A, will allow a further analysis of MNEs’ value chain, acting as a substitute of Country-by-Country (CbC) reporting for entities that do not reach the existing (€750M) threshold. On the other hand, annex H will cover both national and cross-border operations and will allow for a further segregation by category of related party transaction and by counterparty (the tax identification number will have to be disclosed as well), and subsequently allowing the Tax and Customs Authority to carry out a more detailed risk analysis.

In particular, and in addition to the information that was already requested, this updated form will now allow:

  • The express and individualized identification of related entities, by type of related-party transaction, including the identification of the transfer pricing method used per transaction and the identification of any annual changes that have occurred to the adopted methodologies; and
  • A new breakdown category, related to guarantees/collaterals, whose express reference did not existed before (and which is certainly related to the new Organization for Economic Co-operation and Development (OECD) Transfer Prices Guidelines for Financial Transactions).

Even though it was mandatory for the Portuguese transfer pricing regime to have its supporting documentation prepared contemporaneously, the detailed information that is now required to be disclosed in the above mentioned forms makes this circumstance absolutely mandatory.

In conclusion, we understand that with the information that the Tax and Customs Authority currently has access to, their transfer pricing risk analyzes will (with a high degree of probability) become more contemporaneous, allowing simultaneously more timely, targeted and efficient inspections to MNEs.

How can the Covid-19 pandemic affect Economic Groups’ value chains?

Although the effects may vary depending on the size, activity sector, target market, among other factors, the impact of the Covid-19 pandemic will certainly be felt, directly or indirectly, in a higher or lower degree, at national or global level, in all the business and economic sectors.

Among these impacts, we would like to highlight:

  • Value chain and business models – As in previous economic crises, the ability to realign, restructure or change business models in a timely manner may help to mitigate the corresponding adversarial tax impact (related to the location of profits/losses along the value chains, in the various jurisdictions in 2020 onwards). Thus, depending on the MNEs and business in question, it may make more sense to centralize or decentralize the business model(s), adjusting the business margins accordingly.
  • People – The Covid-19 pandemic will certainly, in general, have an impact on the decision makers of organizations and, in particular, on the productivity/movement of people in several jurisdictions, which can lead to departments downsizing, restructuring or business/company relocations, as well as potentially creation of (undesirable) permanent establishments in certain jurisdictions.
  • Liquidity – Depending on the sectors, businesses and markets involved (among other factors), the Covid-19 pandemic will certainly have direct or indirect impacts, of less or greater degree, on the treasury of MNEs, implying a more complex, detailed and frequent analysis, regardless of the moratoriums that may exist.
  • Transfer pricing policies – Anticipating the lower future business margins, but also the higher fixed costs related with the lockdown or business restructuring , we recommend that a detailed analyses is carried out of to the MNEs value chain, as well as to the relative contribution of each entity in the various phases and, if necessary, to review and adapt the transfer pricing policies accordingly to the new functional and risk profiles of each entity. These changes should be appropriate and simultaneously documented with market evidence (e.g. market research; using segmented accounts or detailed management information) and reflected in intra-group agreements (which should be amended, terminated or renegotiated) and in compliance with transfer pricing rules (general or specifics, global or local).

The OECD has already announced the preparation of new transfer pricing guidelines in the context of this Covid-19 pandemic, which will be probably disclosed by the end of this year.

As previously referred, the importance of changes that are necessary to perform, implement and report will surely increase for the purposes of the next FY 2020reporting & compliance season obligation.

And how should economic groups react?

All crises bring new opportunities for doing better, with less resources.

From the above, we recommend that Economic Groups may be able to:

  • Resist – To the existing short-term challenges, regarding MNEs business, costumers, employees an the most immediate liquidity needs. The gathering of the existing factual business evidence is crucial.
  • Return – Design a medium-long term plan for the adjustment of operations, teams and business. The documentation of all these decision-making processes is extremely important, especially when in the future all these situations are thoroughly scrutinized by the Tax Authorities in the various jurisdictions.
  • Reinvent – Assess the implications of the present situation, as well as how business can be reinvented and adapted in long term, aiming not only at survival, but also profit (according to the new regulatory and competitive environment associated with this “new normal”).

Nevertheless, we recommended that MNEs are able to revisit their value chains in a timely manner, as well as to review and realign their transfer pricing policies appropriately, in order to avoid situations where it is difficult to embrace change, without the increasing inherent tax risk and the likelihood of an unfavorable outcome in relation to tax controversy.

In situations where the materiality of related-party transactions justifies it, consideration should be given to the negotiation of Advance Pricing Agreements with Tax and Customs Authorities, in order to increase the associated legal certainty.

In fact, the tax impact of a crisis should not be overlooked, making the situation and the possibility of recovery even more difficult.

And it is exactly at this point (accessing management information, reviewing it in a timely manner, reporting in a contemporary way and/or negotiating in advance with the Tax and Customs Authority) in which it is possible to transform a pure transfer pricing compliance obligation into an effective and an important management tool.


The proposed approach does not prevent the need of an individual analysis for the reality of each Company or MNE.

For further assistance please contact Catarina Breia (+351 91 7575 832 or from our Tax Department.

2020-07-15T10:35:03+00:00 Julho 15th, 2020|Noticias|