To perform tax work efficiently, one must be aware of developments in the tax world, as well as the external factors that come into play. According to the OECD, COVID-19 significantly affects the tax world. However, what is the situation during and after the pandemic? How do you efficiently work on the BEPS-analysis, design a TP-model, make the correct situation analysis, and implement an appropriate implementation strategy?
On the 18th of December 2020, the OECD published their guidance on the transfer pricing implications of the COVID-19 pandemic. The guidance states the need for the analysis of industries and the competitive situation. However, the current situation cannot be compared to the financial crisis of 2008. Therefore, you should pay attention to the differentiated benchmarking, based on the outcome tests and the allocation of extraordinary costs, according to the distribution of functions and risks. ‘Force majeure’ is an exception. State aid is granted according to general TP principles. Besides, always stay alert to changes and assume that you have to make adjustments once the pandemic is over.
BEPS-analysis (Base Erosion and Profit Shifting)
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies of multinational corporations that exploit gaps and discrepancies of tax rules to avoid tax. The BEPS-package provides governments with 15 actions with (inter)national instruments to tackle tax evasion. The tools give businesses greater certainty by reducing disputes over the application of international tax rules and standardizing compliance requirements.
Recognizing the characteristics and risks of tax evasion, as well as safeguarding the assets and other value drivers, is useful for companies. A DEMPE-analysis (Development, Enhancement, Maintenance, Protection & Exploitation) is convenient for intangible assets.
TP-model (Transfer Pricing Model)
The aftermath of COVID-19 has caused changes in TP-models for multinationals. Multinational corporations must evaluate specific steps in their transfer pricing policies for protection and support during the pandemic.
In addition, a suitability analysis – e.g., benchmarking, TNMM and/or profit distribution – can help you with the design of a TP-model. A transaction structure, such as the extraction of permits, can play a significant role in the TP-model format.
The requirements fora n efficient TP-model are:
- Be holistic. Take all tax aspects into account and make use of the operational management concept.
- Be flexible. Respond flexibly to operational developments and take economic cycles into account.
- Be alert. Active management of profit distribution by function and risk distribution is possible, so make sure you keep an eye on this. In addition, ensure sufficient availability and integrity of data.
- Be compatible. Always work according to the correct specifications, work globally and consistently and ensure that you sufficiently document and declare.
Tax situation analysis
When analyzing the tax situation, pay attention to the following:
- The BP history
- The tax attributes, in particular, loss compensation
- The tax rulings
- The tax incentives
- The extra tax aspects
Consider the following points in the implementation strategy:
- The advance uni- or bilateral price agreements
- The rollbacks
- Joint audits of tax audits
Crisis-related adjustments to the TP-model concerning compliance and tax efficiency may be necessary. In principle, the situation regarding COVID-19 does not allow for unique TP routes; however, there are planning options. BEPS sets new requirements for the TP-model but also offers the possibility to check the efficiency of this model. The Base Erosion and Profit Shifting often suggest the analysis of margin-based TP-models with central strategy carriers. International mutual agreement procedures can be part of the tax strategy.
If you have any inquiries, feel free to talk to us, so we can work together to see how you can move forward with your company. You can find information about tax matters on the websites of the OECD and KPMG as well.
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