Transfer Pricing Considerations in Light of Covid-19

The Covid-19 pandemic has dramatically disrupted business operations and financial markets, leaving many companies scrambling to adjust to ever-changing economic circumstances. Many companies are still managing business emergencies or reorganizing operations on the fly, but as organizations begin to stabilize and plan for 2021 (and beyond), transfer pricing is one area that companies should be thinking about.

For companies that have reorganized operations to adapt to the evolving economic and business environment, existing transfer pricing policies may no longer appropriately reflect their corporate structure and intercompany cash flows. For example, some companies have moved parts of their supply chains (e.g., onshoring manufacturing to reduce the need to ship goods), and such a change could make transfer pricing policies—like those related to manufacturing locations—outdated or obsolete. In such cases, it may make sense to revise transfer pricing policies to better match the new organizational structure.

Even for companies that have not seen significant operational changes, reduced profitability or disruptions to cash flows may be straining the organization’s ability to follow existing transfer pricing policies and appropriately compensate all relevant legal entities. Consider a company in which legal entities focused on distribution have historically targeted a specific arm’s-length return (or range of returns). Now, if sales have declined locally or globally for those operations, the local distribution entity, or even the entire global business, may struggle to achieve the target level of profitability.