In its long-awaited advisory document, the OECD also highlighted government aid programs and advance pricing agreements as areas where multinational companies are struggling to comply with transfer pricing strictures.
The guidance reflects the consensus view of the 137 jurisdictions that make up the OECD's policy-setting Inclusive Framework, the Paris-based body explained. Broad agreement from governments on transfer pricing guidelines enhances companies' certainty that they won't be double-taxed or face disputes with national tax authorities, especially during the pandemic, organization officials have said.
Noting that the pandemic has given rise to "unique economic conditions" and government responses that create challenges for applying the arm's-length principle, the guidance said companies and tax authorities face "an urgent need to address these practical questions."
The new document clarifies and illustrates the practical application of the arm's-length principle as articulated in the OECD Transfer Pricing Guidelines "to the unique fact patterns and specific challenges implied by" the pandemic, it stated.
Grace Perez-Navarro, deputy director of the OECD's Center for Tax Policy and Administration, cited challenges that companies continue to face from the pandemic, such as cash-flow constraints and wide variation in profits that have forced changes in business operations.
A number of tax administrations have published domestic guidance on some transfer pricing implications of the pandemic, providing "an important first step in facilitating taxpayer compliance and delivering greater tax certainty," Perez-Navarro said in a blog post coinciding with Friday's guidance release.
She cautioned, however, that "the two-sided nature of transfer pricing means that only through a common agreed approach can tax administrations effectively enhance tax certainty for businesses operating across borders."
While the pandemic has exacerbated the limitations of available data, the OECD guidance offers pragmatic approaches to address information shortcomings in proper valuation of comparable assets, Perez-Navarro added.
The pandemic has also led to unprecedented growth in government assistance programs, prompting questions about the factors that should be evaluated to determine whether receiving such aid may affect transfer prices, she noted.
Regarding advance pricing agreements, which remain a key instrument for bolstering tax certainty in transfer pricing, Perez-Navarro said the new guidance "encourages taxpayers and tax administrations to adopt a flexible and collaborative approach given the current economic conditions."
On Wednesday, the OECD released jurisdiction-specific information on implementation of its approach to hard-to-value intangibles, or HTVI, which since 2015 has monitored participating tax authorities' disclosure of legislation and administrative practices relevant to applying the approach.
This year's HTVI report contains data from 40 jurisdictions including the U.S., Germany, the U.K., Australia and Denmark. The HTVI approach came out of Action 8 under the OECD's base erosion and profit shifting initiative, aimed at aligning transfer pricing outcomes with value creation. It was formally incorporated into the OECD Transfer Pricing Guidelines.
The report found that over half of the 40 jurisdictions surveyed — including France, Switzerland and India — haven't adopted the approach.
Transfer pricing rules require multinationals to set prices on goods, loans and services they provide internally within a corporate group as if they were provided by a third party, but hard-to-value intangible assets don't have a reliable comparable market price at the time they're transferred.
Five years ago, the OECD proposed that countries could choose to accept post-transfer evidence of market value, once the assets could be valued.
--Editing by Vincent Sherry.
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