As a result of the COVID 19 health emergency, compliance with the market value principle becomes an important challenge for Business Groups, given the economic impacts that has been generated in most industries around the world during fiscal years 2020-2021 and will continue to have implications in the following years. That said, the need arises to review intercompany policies, as well as to carry out a financial analysis of the areas that help to measure the economic impact and tax implications during the period affected by this situation.
By virtue of the foregoing, it is important that Business Groups carry out an analysis of the economic effect caused by the COVID 19 health emergency, in order to identify and quantify all significant variations in the financial information of taxpayers that could affect the profit margin obtained in intercompany operations in said fiscal years, in such a way as to verify compliance with market values and in the event of a review by the tax authorities, to be able to demonstrate that the variations presented were the result of a global economic effect and not because of a transfer pricing malpractice.
In addition, during this 2020-2021 period, the Business Groups have seen the need to delay, defer or cancel the collections or payments they have with their related parties, derived from the cash flow limitations they present, so on many occasions, transactions have had to be restructured and their real economic conditions are not the same as those established in the contractual terms. In this sense, the transfer pricing regulations establish that intercompany transactions must be duly supported by a contract that clearly establishes the operation, the activities carried out, the risks assumed, terms of collection and payment of the parties involved. Although, the essence of a transfer pricing analysis is to analyze and demonstrate that the operations between companies of the same Group were carried out under the same economic conditions as those carried out with or between independent third parties, the need arises to carry out a review of the cash flow associated with the transactions carried out between related parties, in such a way that the reality is adapted to what is stated in the contractual terms. Similarly, it must be verified that, if there have been similar operations with independent third parties, the terms in terms of collection and payment were similar to those agreed in operations with associated companies, this to validate compliance with the arm’s length principle. In the event that Business Groups fall into any of these assumptions, variations in profit margins and changes in contractual conditions must be documented and supported from a legal, tax, business and transfer pricing point of view.
Faced with this situation, it is important to evaluate the adjustment in the established intercompany policies, considering agreeing to more flexible conditions that allow adjusting to the current economic reality. Likewise, it is important to carry out an analysis of the extraordinary costs, which can be associated with various concepts generated by the health emergency, some of them may be the costs related to the termination of contracts and labor effects, storage costs, obsolescence, as well as of various elements such as variations in sales volumes between one period and another, income budget under normal circumstances, quantification of government aid in this situation, identification of controlled operations that were affected by the COVID 19 health emergency, payment terms and payment, among other circumstances that may have affected the taxpayer’s result.
It is important that the transfer pricing advisers, when carrying out the economic analysis of the transactions carried out during the affected years, should consider the different criteria in the search strategies for comparable companies and in this event, it may be necessary to make the corresponding comparability adjustments, which may consist of performing a financial analysis of multiple years compared to the year in question; adjustments regarding working capital; days of accounts payable; days of accounts receivable; obsolescence and costs and extraordinary expenses; among other applicable adjustments, in order to assimilate as far as possible the financial information of those comparable to our analyzed company.
Finally, it is important that all these aspects are analyzed and the transfer pricing design are carried out in order to document the Group’s operating model associated with intercompany operations, renegotiate the contractual terms and carry out an analysis in a timely manner that is appropriate. current economic conditions and thus avoid penalties by the tax authorities.