COVID-19 Impacts on Transfer Pricing

The new coronavirus pandemic placed us in an extraordinary, novel situation. The changes it imposes impact the business processes of companies.

In these circumstances, are changes required now in transfer pricing policies and documentation of related party transactions?

Most probably, yes. These are some of the reasons why:

  • The transfer pricing method most commonly applied in cases where internal comparables are not available is the transactional net margin method (TNMM). Information used thereunder to determine an arm’s length range, in which the financial indicator of the tested (related) party to the analysed controlled transaction is to fall, is derived from public financial statements. Data for them become available, in normal circumstances, not earlier than 6 months after the end of the period when the analysed transactions have taken place. Thus, TNMM is most often applied based on historic data. For instance, in 2019 transfer pricing documentation and particularly in the local file prepared within the regular deadline for submission of the corporate tax return, a company would present an arm’s length range of independent comparable companies’ financial indicators for a period encompassing 2018 as the last reporting year. On the other hand, a number of related party agreements provide for transfer pricing and adjustments thereof, which is also based on an arm’s length range of data from past periods.

This approach of documenting compliance with the arm’s length principle is inoperative for financial year 2020 when the economy is blocked and economic circumstance are not comparable to those in previous years. In this situation, it is recommendable for companies to switch to the approach of documentation on an ex-ante basis, i.e. at the time transactions are undertaken. It requires, including but not limited to: documenting changes in the environment, including in the business sector of the enterprise, the resulting impacts on its activities and decisions made on changes in the business processes in response to the crisis; reviewing internal sources of market information, from transactions with independent entities; revising business plans, budgets and financial modelling of the effect of changes on operating results, based on which to substantiate (or not) an update of the transfer pricing policy; effecting corresponding changes in contractual terms.

  • Ensuring sufficient liquidity is a challenge in a crisis situation. Changes to payment terms become a common practice in transactions between independent parties. Bank creditors offer renegotiation of credit terms to its good faith debtors as a relief in the new situation. These circumstances require analysis and decision-making on whether changes are correspondingly needed also in the terms and conditions of transactions with related customers, suppliers, respectively debtors and creditors.

  • Disruptions in supply chains may require changes in business processes related to relocation of functions, risks and/or assets among related enterprises. This might result in changes in the functional profiles of parties to the transactions. Transfer pricing analysis and documentation is required of both the changes themselves and of controlled transactions which a company will start (or discontinue) undertaking.

  • Some intragroup services (which are scrutinized during tax examinations or audits) may, given the crisis circumstances, become difficult to substantiate as related to (meeting the benefit test for) the activities of the company recipient, if as a result of the new situation some management or administrative processes are decentralised. This would also require reconsidering and updating the transfer pricing policy in its respective part.

This material is prepared for informative purposes and shall not be considered as individual advice or consultation. Should questions arise or if you need further information, please do not hesitate to contact Gergana Ahtchieva, Senior Manager, at email:, tel.:+359 2 943 37 00, address: 38, Oborishte Street, 1504 Sofia.