Nearly every government in the world must adopt extraordinary policies to tackle the COVID-19 pandemic, particularly its negative impacts on people's health and economy. Social assistance and monetary and fiscal incentives are common stimulus measures at a time of economic crisis. It became the concern of the Organization for Economic Co-operation and Development (OECD) when releasing the transfer pricing documentation guidelines for businesses by Covid-19. Mainly related to the impact of government stimulus on corporate related-party transactions.
The government assistance referred to by the OECD in its report entitled Guidance on the Transfer Pricing Implications of the Covid-19 Pandemic is a monetary or non-monetary policy that provides a direct or indirect economic benefits to eligible taxpayers. The assistance can be in the form of grants, subsidies, credits (forgivable loans), tax deductions, or investment allowances.
In this case, the OECD reminded companies to take proper account of all the implications of the use of government assistance and its effects on the transfer pricing. There are a number of conditions that need to be analyzed regarding the impact of government stimulus policies—especially when comparable data is not available.
First, whether the receipt of government assistance provides a market advantage to the recipient. Secondly, how it affects the rate of increase in revenue and decrease in costs — vis-à-vis those of reliable comparable companies — and the duration of the policy (assistance). Third, the degree to which benefits of government assistance received by companies are passed on to independent customers or suppliers.
Fourth, under what circumstances the benefits of government assistance cannot be fully passed on to independent customers or suppliers. On the other hand, independent enterprises operating under similar circumstances would allocate such benefits between them.
Allocation of Risk
Under the guidance of OECD Transfer Pricing Guideline, the provision of government assistance to an associated party will not change the allocation of risk in a controlled transaction for transfer pricing purposes. For instance, market risk, under the prevailing facts and circumstances, the government assistance in tackling company financial distress derived from Covid-19 pandemic, does not modify the company's allocation of marketplace risk. Despite government intervention, the company will retain its competence and remain at marketplace risks and business risks.
The comparability of open market transactions may be influenced by the utilization of government assistance. Especially how the parties establish their commercial or financial relations and how they price their transactions.
Therefore, when performing a comparability analysis, it may be necessary to take into account the receipt of government assistance when reviewing potential comparables. For example, government assistance and Covid-19 pandemic may affect the comparables and the arm’s length prices of uncontrolled transactions.
In essence, the materiality of the change in economically relevant circumstances created by the impact of government assistance may impose additional challenges to the comparability analysis. For example, uncontrolled transactions are not all considered comparable and do not all receive government assistance. In such cases, the use of a corroborating transfer pricing methodology may need to be applied to take account of the differences in comparability.
In the case of using the one-sided method - such as the resale price method, the cost plus method, or TNMM—
need to be specifically identified related to the accounting treatment of the government assistance in both the tested party and any comparable. Especially when the tested party and the comparables apply different accounting standards. For instance, government assistance may be deducted from the costs under the relevant accounting standard, or it may be presented separately.
Also, the accounting treatment of government subsidies under different accounting standards may impact different levels of profitability. If the accounting treatment of the same type of assistance differs between the tested party and the comparable, a comparability adjustment may be required.