The new OECD guidelines on transfer pricing

The new OECD guidelines on transfer pricing

The article discusses some key questions faced by multinational companies in the context of the COVID-19 scenario and related OECD Guidance.


The Covid-19 outbreak has caused an unprecendented worldwide crisis and has impacted the economy in a way that the effects would be felt for a very long period of time. This pandemic has also had its impact on Transfer Pricing and will change the way that the inter-company transactions are carried out and how the prices are determined in those transactions. We have discussed in this article, some of the key questions in light of the OECD report published on the transfer pricing implications of the Covid-19 pandemic (dated Dec. 18, 2020).

Key questions and recommendations

Can entities operating under limited risk arrangements incur losses?

Under normal conditions, it is the entrepreneur who defines the strategy of the MNE. The enterprenuer generally gets the residual profit after the limited risk entities get their secured profit. Conversely, if the strategy defined by the entrepreneur leads to losses, the entrepreneur bears the residual loss after the limited risk companies receive their secured profit.

However, in the current Covid-19 context, it is not the strategy of the entrepreneur which will generate the overall loss of the MNEs. The losses would be on the account of shutdown/ slowdown of certain sectors.

It can be said that the tax authorities will question any such transfer pricing models wherein the enterpreneur bears all the losses and the limited risk entities do not bear any risk at all.

The new OECD guidelines on transfer pricing implications of Covid-19 pandemic provides a very generic answer and states that “In all circumstances it will be necessary to consider the specific facts and circumstances when determining whether a so-called “limited-risk” entity could incur losses at arm’s-length”. 

For example where there is a significant decline in demand due to Covid-19, a limited-risk distributor that assumes some marketplace risk may at arm’s length earn a loss associated with the playing out of this risk. The extent of the loss that may be earned at arm’s length will be determined by the conditions and the economically relevant characteristics of the accurately delineated transaction compared to those of comparable uncontrolled transactions.”

How should operational or exceptional costs arising from Covid-19 be allocated between related parties?

The guidance introduces the concept of “exceptional and non-recurring operating costs” and states that “As a result of the Covid-19 pandemic, many enterprises have incurred exceptional, non-recurring operating costs relevant to differing operating conditions for the pandemic period.”

Three general principles on the allocation of losses (between associated entities) have been discussed in the guidance:

  • The allocation of the risks should provide direction on how profits/ losses should be allocated.
  • Exceptional, non-recurring operating costs arising as a result of Covid-19 should be allocated based on an assessment of how independent enterprises under comparable circumstances operate.
  • Related parties may consider whether they have the option to apply force majeure clauses.
  1. How may force majeure affect the allocation of losses derived from the Covid-19 pandemic?

Per the guidance, it cannot be automatically assumed that when a relevant intercompany contract contains a force majeure clause that the Covid-19 pandemic is sufficient for a party to that contract to invoke force majeure, nor can it be automatically assumed in the absence of such a clause in the intercompany contract that a renegotiation with a potentially similar outcome at arm’s-length would be inappropriate.

Care should be taken to assess whether the magnitude of the disruption caused by Covid-19 in the specific related party situation qualifies as a force majeure event, and to review the force majeure clause in the context of the overall relationship and contractual agreement.

Under what circumstances may arrangements be modified to address the consequences of Covid-19?

The guidance states that the determination of whether a renegotiation of arm’s-length should be undertaken will be based on what independent parties would do under comparable circumstances.

Does Covid-19 have an impact on an existing Advanced Pricing Arrangement (APA)?

Existing APA and their terms should be respected, maintained, and upheld, unless a condition leading to the cancellation has occurred. Taxpayers and tax administrations cannot automatically disregard or alter the terms of existing APA due to the change in economic circumstances.

Does Covid-19 have an Impact on an APA under negotiation?

Where taxpayers and tax administrations are negotiating an APA that is intended to cover 2020, all parties are encouraged to adopt a flexible and collaborative approach to determine how to take into account the current economic conditions. Consideration could be given to agreeing a short period APA covering the period affected by the Covid-19 pandemic and a separate APA covering the post-Covid period.


The guidance contained in this OECD Report provides a framework for analyzing some of the key transfer pricing issues that companies would encounter due to the pandemic.

However, it is recommended for the MNEs to undertake a thorough and precise diagnosis of the situation, an identification of the risks involved and, on this basis, determine the adjustments that can be made.