Covid Brings Transfer Pricing Issues

As multinational groups respond to the challenges presented by the coronavirus outbreak, many of them need to update their transfer pricing policies and internal supply chains, as well as their outward-facing business operations. General counsel have a key role to play in ensuring that the legal aspects of these transitions are managed appropriately.

A key concept in transfer pricing is the “arm’s length principle.” This requires transfer prices to be determined based on conditions that would be made between independent or unrelated enterprises.
In order for a group’s transfer pricing policies to be actually implemented, as opposed to a theoretical statement of intent, the allocation of risk and reward must be reflected in the legal terms of appropriate inter-company agreements.

In principle, the legal considerations when reviewing and revising inter-company agreements in response to Covid-19 are no different than any other exercise for reviewing intra-group legal structures in connection with the revision of transfer pricing policies and business restructurings. In-house legal functions have a vital role to play in managing these issues.

For the purposes of managing personal liability risks of directors, the process by which legal intra-group arrangements are restructured is as important as the outcome. In order to comply with the principle of informed consent in all but the simplest restructurings, it is important to brief directors on what they are being asked to approve, why, and what the actual and likely implications are.