Key things

The effects of the COVID-19 pandemic are not in themselves sufficient to argue that a particular member of the group should bear the consequences of the resulting risks, nor provide a basis for the transfer of risks between the parties. Lack of clear evidence that independent parties in comparable circumstances would have revised their existing agreements or commercial relations, modification of existing arrangements might not be consistent with the “arm’s length principle”. Taxpayers should be cautious in any potential modification of the existing arrangements, which should be well-supported by documentation outlining how the modification is in line with the “arm’s length principle”. Any consideration needed from a transfer pricing perspective in the light of COVID-19 pandemic and determination of an appropriate approach will be highly dependent on and will need to take into account specific facts and circumstances of a particular taxpayer.

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The economic conditions that arose as a result of the COVID-19 pandemic, as well as state measures - response to the pandemic have opened a number of questions and led to practical challenges in respect to the application of the “arm’s length principle” and assessment of consistency of inter-company transactions with the “arm’s length principle”.

On December 18, 2020 OECD published additional guidelines on transfer pricing implications of the COVID-19 pandemic. Guidelines put emphasis on the following four priority areas:

Comparability Analysis

The pandemic might reduce the reliance of historical data when performing comparability analyses for current transactions. The timing issue might especially be significant when performing analyses under TNMM. The guidance details the sources of information that can be used in order to support the performance of a comparability analysis: analysis of changes in sales volumes, capacity utilization, exceptional costs, government interventions, macroeconomic information and other statistical methods. Moreover, the guidance stress out an importance of geographical comparability when conducting benchmarking studies in the following period (e.g. due to different government measures and programmes) and suggests that use of supporting methods might be appropriate, in order to verify an inferences of analysis.

Losses and Allocation of COVID-19 Specific Costs

The OECD induces that the allocation of losses, caused by COVID-19 pandemic, should be linked to the existing allocation of risks. It also considers how exceptional, non-recurring operating costs should be

 allocated between associated enterprises. The guidance point-out that it will be important to consider at arm’s length which party to the controlled transaction would have borne these additional costs, by taking into account among other who has the responsibility for performing activities related to the relevant costs and who assumes related risks, also other relevant factors.

State Aid Programmes

In its guidelines OECD states that implications of the received state aid would need to be carefully analysed, having in mind factors such as whether the received state aid provides a market advantage to recipient, an amount of any increase in revenues or decrease in costs, duration of the assistance, and most importantly the degree to which benefits of government assistance, at arm’s length, would be passed on to independent customers or suppliers and if so, how would independent parties allocate such benefits between them. Elements to consider in analysing effects of received state aid on the price of a controlled transaction, if any, are, inter alia: the availability, purpose, duration and other conditions imposed by the government in granting the assistance, the allocation of the economically significant risks, and the level of competition and demand within the relevant markets.

Advance Pricing Arrangements (“APAs”)

Taxpayers and tax authorities are bound by existing APAs, unless a circumstance leading to the cancellation, revision or revocation of the APA (such as breach of critical assumptions) has occurred. In its Guidelines provide recommendations and crisply depicts conditions as regards the application of such circumstances, as well as how taxpayers and tax authorities might deal with it. As APA are not available for taxpayers in Serbia, this topic is not truly relevant for our country.