February 2021 Tax Alert


Inland Revenue and OECD provide further guidance on COVID-19 related transfer pricing issues 

Tax Alert - February 2021

By Bart de Gouw, Julian Bryant & Celia Brownlee

On 18 December 2020, the OECD released Guidance on the transfer pricing implications of the COVID-19 pandemic. As a result, New Zealand’s Inland Revenue (IR) has updated its guidance on COVID-19 transfer pricing issues. IR’s initial guidance was outlined in our article in the September 2020 edition of Tax Alert. The new guidance is consistent with that initial guidance, but now references the OECD guidance and elaborates on matters such as limited risk arrangements, losses and treatment of the Wage Subsidy. For completeness we note that the OECD has also published updated guidance on tax treaties and the impact of the COVID-19 pandemic on 21 January 2021, which is covered in this article from this month's Tax Alert.

While the overriding theme is that transactions must continue to be conducted in accordance with the arm’s length principle, there is recognition that there are a number of practical difficulties in applying the arm’s length principle. The OECD guidance on the transfer pricing implications of the COVID-19 pandemic focuses on four priority issues:

(i) Comparability analysis;
(ii) Losses and the allocation of COVID-19 specific costs;
(iii) Government assistance programmes; and
(iv) Advance pricing agreements (APAs)

The following provides a summary of each of those issues with specific reference to IR guidance. Deloitte’s summary of the OECD guidance can be found here.

Comparability analysis

Identifying reliable comparable data to support the arm’s length nature of financial outcomes may be difficult in exceptional economic circumstances arising from COVID-19, particularly in the short term. Comparability analysis relating to contemporaneous transactions between independent parties in markets facing similar conditions (e.g. in the same jurisdiction) would be the most reliable, but may not be available, particularly when applying the transactional net margin method (‘TNMM’), because financial year 2020 information will typically not be available until much later. Care should be taken when selecting sets of comparable data as economic and market conditions in some markets could materially differ from New Zealand in a COVID-19 environment (for example Europe or the UK), and this might require using new comparable sets rather than updating the financials of existing sets in some circumstances. It also may not be appropriate to mechanically apply ordinary transfer pricing approaches that have been applied in prior years. The OECD also discusses the potential to agree a price adjustment mechanism in controlled transactions to allow more time to make adjustments in a subsequent income year.

Both IR and the OECD have identified a number of practical approaches that may assist in the absence of comparable data. IR suggests reference to pre-COVID-19 expectations and analysis of variances that have arisen due to COVID-19 impacts, both positive and negative. In doing so, IR require detailed consideration of the financial impacts on the local entity and compilation of supporting evidence, including documenting:

  • why local sales are lower than expected;
  • why local expenses are higher than expected
  • any unusual financial items;
  • any government assistance received
  • the impact of any amended intra-group transactions; and
  • any adjustments made.
Losses and the allocation of COVID-19 specific costs

The OECD’s guidance notes that any labels such as “limited risk distributor” do not preclude an entity from bearing losses where those losses in fact relate to risks assumed. Any losses or allocation of COVID-19 specific costs will need to be consistent with the allocation of risks between parties with respect to the tested transaction, and carefully documented. The guidance anticipates that a limited-risk distributor that assumes some marketplace risk may, at arm’s length, earn a loss, for example where decline in demand means that the value of sales does not cover the fixed local costs. However, a distributor that does not take on inventory risk should not bear any losses associated with inventory obsolescence.

IR have stated that any changes to the risks assumed by parties to a tested transaction compared to periods before or during the COVID-19 pandemic will come under scrutiny, and if it is purported that an entity has always assumed a risk that has materialised during the COVID-19 pandemic, IR would expect the entity to have been compensated for assuming that risk in prior periods.

Government assistance programmes

IR has stated a clear position on the treatment of the Wage Subsidy, including the Wage Subsidy Extension and the Resurgence Wage Subsidy. IR’s expectation is that where the Wage Subsidy was received by a multinational operating in New Zealand, the benefit of that subsidy should generally be retained by that entity. IR has explained its rationale for this with regard to the OECD guidance on the transfer pricing implications of the COVID-19 pandemic, and provided examples in both the context of a distributor and service provider operating in New Zealand. IR cautions against mechanistic approaches to the application of transfer pricing methodologies without proper analysis, as this could result in non-arm’s length pricing. This includes circumstances where subsidies received have been offset against wages and salary costs in accounting records.

The OECD provides guidance on the allocation of COVID-19 specific costs, for example expenditure on personal protective equipment, reconfiguration of workspaces, and IT infrastructure for tracing or remote working. The accurate delineation of the transaction should be the first consideration to inform which party should bear exceptional costs. We consider the analysis of the treatment of exceptional items and government subsidies might be able to be considered together in some circumstances to provide an outcome that is arm’s length and commercially reasonable.

Advanced Pricing Agreements (APAs)

IR has not provided specific advice on APAs in the context of COVID-19. The OECD acknowledges that COVID-19 has led to material changes in economic conditions that were not anticipated when many existing APAs were agreed to. Tax authorities and businesses should not automatically disregard terms of an APA, or unilaterally alter them. Instead businesses are encouraged to notify tax authorities as soon as possible when it appears the changes in economic conditions might lead to a breach of a critical assumption in the APA and seek collaborative solutions.


The recent guidance from the OECD and IR provide some additional clarity in respect of approaching transfer pricing issues arising in the context of the COVID-19 pandemic, while highlighting the risks of mechanical application of existing transfer pricing policies without further analysis. The guidance emphasises the importance of preparing supporting documentation detailing operational and financial impacts of the COVID-19 pandemic on New Zealand businesses (both positive and negative), and transfer pricing approaches taken. It is important that multinational groups with operations in New Zealand turn their mind to the specific position of the New Zealand business, which may have been impacted differently to other group members in other jurisdictions.

If you have any questions about your transfer pricing policies, and preparation of appropriate supporting documentation, please contact your usual Deloitte tax advisor.

The content of this article is accurate as at 3 February 2021, the time of publication. This article does not constitute advice; if you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.

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