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The emergence of COVID-19 pandemic crisis raises a number of new challenges for companies, as more and more sectors suffer from the economic effects of the virus. The pandemic clearly affects the supply chains of multinational enterprises (MNEs) and their intercompany transactions, consequently, transfer prices. Not only supply chain disruptions or challenges of cross-border mobility of their employees are the challenges which MNEs have to face with, but also significant erosion on their profit margins and consequently on their tax base, which may predict certain government actions.
As a result of the governmental measures taken to curb the epidemic, companies are striving to adapt their business processes in a way to cause the least possible interruption on the continuity of their operations. Consequently, our Clients may face with a number of factors that could have significant transfer pricing implications for an international group, e.g. from the issue of loss-making operation to the reorganization of business models or complete group structures.
The OECD Transfer Pricing Guidelines deals in detail with the consideration of outstanding economic situations. Although losses caused particularly by force majeure is neither discussed by the international OECD Transfer Pricing Guidelines nor local Hungarian regulations, so in this regard we cannot rely on clear guidance, certain useful conclusions can be drawn from these regulations. The elaboration of the new business processes and pricing constructions can be a serious matter from the perspective of the arm’s length principle and administrative tasks, as potential breaches of corporate tax base – implying significant shortage of national tax revenues – come under focus. As a result, transfer pricing planning and supporting unfavourable business conditions with appropriate documentations have become more important than ever.
It is already clear that the administrative burden on MNEs will increase radically in 2020. Additionally, we need to be prepared for that the significant governmental efforts made for finance the pandemic measures and stimulate the economy will inevitably result in future pressure on tax authorities to boost tax revenues through audits. We believe that in the current economic climate, this must not be a governmental priority until the outbreak of the pandemic, but after the affected years, MNEs are likely to see increased scrutiny by tax authorities. Accordingly, high proactivity might be required from taxpayers in respect of transfer pricing planning, focusing on the relationships between adverse economic factors attributable to the epidemic and the performance of the affected tax years.