Inland Revenue provides initial guidance on COVID-19 transfer pricing issues

By Bart de Gouw & Julian Bryant
 

New Zealand’s Inland Revenue (IR) has recently provided initial guidance on transfer pricing in the context of COVID-19. It recognises that the transfer pricing issues arising will be wide-ranging and vary between businesses and across jurisdictions.

IR states that transactions must continue to be conducted in accordance with the arm’s length principle during the COVID-19 pandemic with existing guidance continuing to be relevant, including the OECD’s Transfer Pricing Guidelines published in 2017. However, IR recognises that practical difficulties in applying the arm’s length principle may arise during this time.

It is noted by IR that in exceptional economic circumstances, identifying reliable comparable data to support the arm’s length nature of financial outcomes may be difficult, particularly in the short term. In the absence of comparable data, a “pragmatic approach” is suggested, involving reference to pre-COVID-19 expectations and analysis of variances that have arisen due to COVID-19 impacts, both positive and negative. This is likely to require detailed consideration of the financial impacts of the local entity and compilation of supporting evidence.

The importance of documenting the impacts of COVID-19 in contemporaneous transfer pricing documentation (i.e, a New Zealand transfer pricing local file) is emphasised. Taxpayers are encouraged to:

• identify and collate evidence to document the nature, duration and extent of any material COVID-19 related impacts on the group and local business;
• document relevant group and local business responses to the pandemic, including for example, any changes in business strategies, changes in the characteristics of product or service offerings and so forth;
• identify and explain any changes in group and local business functions, assets and risks during the impacted period, including how these relate to the business’ exposure to, or mitigation of, COVID-19 impacts;
• identify and explain any changes in intra-group transactions and contractual terms;
• document the supporting rationale for any changes to intra-group transfer prices, including why they are considered to be arm’s length in the circumstances; and
• identify the impact of COVID-19 on the overall profitability of the MNE group and the local entity.

The guidance is a timely reminder for New Zealand taxpayers which are members of a multinational group that historic transfer pricing approaches may not be appropriate for financial years impacted by the COVID-19. Greater analysis also may be required in respect of specific circumstances impacting the local New Zealand entity compared to previous years. This is especially the case given the relatively unique economic circumstances applicable to New Zealand businesses, including in the context of New Zealand’s Covid-19 Alert Levels and periods of relatively unrestricted economic activity.