Tuesday, January 18

Transfer pricing disputes may be on the rise due to Covid-19 outages

Covid-19 global restrictions on the movement of people and goods have disrupted long-standing intercompany trade agreements and affected normal pricing agreements.

This may well result in an increase in transfer pricing disputes between taxpayers and tax authorities, experts warned during the 10th Summit on transfer pricing in Africa organized by the South African Tax Institute (Sait).

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In the past two years, multinational companies have faced challenges they have never faced before, with disrupted supply chains, faltering economic demand and rising unemployment, said Chantel Venter, MD of Impact Transfer Pricing.

As a result, compliance with transfer pricing was not high on the priority list. Business-to-business transactions that were previously conducted according to the arm’s length principle have been modified in an attempt to survive.

The arm’s length pricing principle is central to intercompany pricing agreements: the transfer price should be similar to the price that would be charged if the product were sold or purchased from an unrelated party.


Cabrini McCarrick, a transfer pricing partner at Regan van Rooy, said the disruptions led to an increase in intercompany lending, ranging from interest-free loans, down payments or even discounted prices and late payments.

All of this will have consequences on transfer pricing, he said.

The groups experienced volatility in terms of for-profit entities and changes in the functional profiles of the companies. “Any change that occurs, be it additional transactions or a change in the risk function of an entity within the group, will trigger an automatic review of transfer prices.”

Venter commented that due to global disruptions, third-party comparability, the basis of the arm’s length principle, has been compromised.

“The entities did not comply with some of the terms and conditions of the agreements between companies in an attempt to minimize the negative impact of the pandemic,” he said.


The Organization for Economic Cooperation and Development (OECD) has published guidelines on how to meet the challenges of comparability analysis. However, Patrick McLennan, associate director of BDO, says that the guide is not really “groundbreaking”.

It really only covers what companies would have considered in another “extraordinary circumstance”.

McLennan said the pandemic had a significant impact on the price of transactions that may have tainted third-party comparability.

“We don’t know what these comparable companies experienced during the pandemic.” Publicly available information on comparable companies is not always as readily available in Africa as it is in the rest of the world, he noted.


Mazars senior manager Charl Hall noted that while some companies struggled to survive, others in retail and online distribution excelled during the pandemic.

“Now they have to consider how to deal with these increased benefits from a transfer pricing policy perspective… A group needs to assess the possible transfer pricing adjustments they may have made. It must be carefully documented to avoid future disputes with the tax authorities. ”

Companies must create a “narrative” about what happened to the business during the pandemic, Venter advised. “It will be difficult to recreate what happened a few years later.

“It is best to act proactively by recording and retaining information on the business reason behind business decisions during the pandemic.”

Documentation retention

Companies are encouraged to retain supporting documents related to pre and post Covid budgets, diligently record changes to transfer pricing policies, and maintain documentation illustrating restrictions on the movement of people and products.

Kerry Watkin, an attorney for TRM Tax Attorneys, emphasized the need to digitally archive transfer pricing documentation. Paper and staff become risky in the long run. “Staff members resign, retire, emigrate or die and paper is lost, wet, destroyed, misplaced.”

The absence of records presents a huge risk.

“A taxpayer can be squeaky clean, but because they cannot meet the burden of proof, they may find themselves in a very unenviable position,” he said.

Venter said it is vital to demonstrate how restructuring costs were handled during the pandemic and to maintain any information related to changes in sales volumes, government assistance and macroeconomic information.

On the rise

The pandemic has affected tax collection in many countries and tax authorities have difficulty filling empty coffers.

It seems that transfer pricing adjustments, audits, disputes, and even litigation can be on the rise.

Watkin said the power of the audit process should not be underestimated. In fact, it can be of great help in resolving issues before costly disputes or litigation occur.

If there is a risk in the company’s transfer pricing landscape, it should be acknowledged, rather than trying to dodge the inevitable bullet.

Okkie Kellerman, an independent consultant, agreed that risks must be addressed from the start. The South African Revenue Service (Sars) is not going to be spooked by an aggressively worded four page letter.

“We tend to believe that we can try everything, but sometimes the policy is grandly designed but rarely implemented in practice. Sometimes you will find a discrepancy between the policy and what you can actually prove. ”

In some cases, the policy can be flawed and then technical issues should take a backseat when responding to Sars’ inquiries, Kellerman advised.


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