We are in the midst of a crisis whose magnitude and depth change daily and whose full effects will not be known for some time. Naturally, companies want and need to take steps to deal with the uncertainty caused by covid-19 or take steps to ensure that their operations can survive potential outbreaks or similar events in the future. These measures have an impact on transfer pricing, and if companies have an initial pricing agreement (APA) or apply for an ABS, the uncertainty caused by Covid-19 increases the need for careful scrutiny of a company`s transfer pricing policy. In general, APAs are particularly useful for complex transactions that would otherwise require lengthy audits by tax authorities. In these situations, it may be beneficial to obtain an APA to avoid auditing. Initial pricing agreements can also be useful in risky transactions where important questions may arise about the transfer pricing method used and its application. B for example in the transfer of intellectual property (IP). Only a few initial price agreements are successfully concluded each year in the United States. In 2020, there were only 127; This number is not significantly higher than the 71 APAs performed on average over the 29-year life of the program per year. Growth in abs utilization has been fairly consistent with growth in the global economy since the program began. APAs have been part of federal and international transfer pricing systems since the early and mid-1990s, but it appears to be the first formal program offered at the state level.  “In general, an APA is an agreement between the taxpayer and [a government] that binds the taxpayer to a defined method of transfer pricing and, in turn, provides that.
the [Government] will not dispute in the examination of whether the [intercompany] transactions […]. which are covered by the agreement have been carried out under market conditions.  ABS can be unilateral (with a government) or, if there are tax treaties, bilateral or multilateral (between two or more governments and the related parties concerned in each country). In general, taxpayers must submit a request for a PPA to the governments concerned (which requires important advance information and economic disclosures) in the hope that governments will accept the request for a PPA. Even if governments accept the motion, there is no certainty that governments and taxpayers will reach a final agreement. In addition, businesses hit hard by the Covid-19 outbreak may need additional financial resources and consider reducing their profit margins in local jurisdictions. It is important to distinguish cash requirements from profits first, as some short-term cash requirements can be met without affecting profits, for example by changing the terms of payment of intercompany liabilities/receivables or short-term loans. However, if companies wish to revise their transfer pricing, conduct new transactions or terminate certain transactions, it is important to understand the impact of these decisions on an APP and to understand what these changes should be disclosed to the parties and when. As described above, this decision may have a significant impact on intercompany expenses and the resulting profits for the subsidiary. Given the level of support put in place to mitigate the economic impact of Covid-19, taxpayers should ensure that such support is identified and monitored and that due account is taken of local transfer pricing rules/laws as they might apply to such types of amounts and how the terms of their ABS should be interpreted in this regard. This can be difficult, as this type of scenario would probably not have been foreseen. Europe.
European jurisdictions are quite unique in their APA processes, each highly dependent on the tax authorities involved. However, in many cases, APAs do not cover exceptional scenarios such as pandemics that could have a significant impact on the transfer pricing model. Possible impacts on the transfer pricing model could be (i) market conditions; (ii) other external factors related to Covid-19; (iii) corporate restructuring; (iv) changes in the functioning and risk profile of the taxable person; and/or (v) the organisation of the taxpayer`s value chain. Therefore, taxpayers who have adhered to APAs should review the terms of the ABS to identify adjustment options due to the Covid-19 economic downturn. So, what is an initial pricing agreement? In this article, we define an APA, describe the procedure for obtaining an APA, and look at the pros and cons of an APA. Governments around the world are announcing extreme measures never seen before. These are diverse and varied ranging from income replacement and wage subsidies, interest-free or low-interest loans, guarantees or subsidies, to name just a few examples. A crucial question for taxpayers who have APAs is how these amounts should be treated for transfer pricing purposes. For example, if a business receives remuneration on the basis of the cost plus a related party, should government subsidies or wage subsidies be deducted from the cost of calculating the cost base subject to the surtax, or should they be excluded from the calculation and become additional income for the business that received it? Let`s take the following numerical example: In this time of economic crisis and uncertainty caused by Covid-19, companies using abs to achieve transfer pricing certainty should take due account of how changes in markets and economic conditions affect their transfer pricing policies, that are already subject to an existing ABS or are under review as part of an ongoing aPA process.
In particular, companies may wish to assess (1) how changes in transfer pricing or the occurrence of one-off and one-off special fees to combat Covid-19 may affect the APA or be included in the APA; (2) whether and how any of the means or measures of economic support introduced worldwide are to be included in the entity`s transfer pricing models and APAs; (3) if it is feasible or desirable, given the impact of Covid-19, to proceed with an APA already in force; (4) the advisability of pursuing an ABS application given the uncertainty about future economic conditions over the life of the ABS; and (5) how Covid-19 is changing the outlook and timing of the ABS process. .