Recently, there’s been no shortage of articles on the impact of COVID-19 on transfer pricing, most of which discuss specific transfer pricing issues raised by the current economic disruption (e.g., the impact of losses on LRDs). Many of these articles offer a number of interesting insights.
But I think something has been missing. While the economic impacts of COVID-19 have clearly been “bad,” the ways in which they are bad are very different during the lockdown than during the economic recession that is likely to follow. (Tweet this!) While there are clearly different ways of thinking about this, I think it is useful to split the COVID-19 economy into the following four phases:
Finally, the economic changes listed above may be accompanied by equally significant changes in the regulatory environment. BEPS has already led to significant changes in how tax authorities view tax and transfer pricing; the economic pressures imposed by COVID-19 can also be expected to shape the way in which governments view tax and transfer pricing going forward. While I do not pretend to have a precise roadmap for the direction of such changes (will mounting deficits force tax authorities to seek more tax income and recapture income sheltered in tax havens, or will prolonged unemployment lead to aggressive tax competition to make sure that “my” country recovers first?), I do suspect that the past will become a much less reliable predictor of the future than I would have thought just a couple of months ago. Business arrangements that made excellent sense yesterday may be untenable tomorrow.
Transfer pricing analyses are closely linked to economic conditions, and therefore the transfer pricing issues that arise during the Lockdown—which, like the Dance, is clearly something that we have not seen before—are likely to be different from those that arise during the Recession (which we did see in 2008 and 2009), or due to the long-term disruptive impacts of the economic response to COVID-19 (which are likely to mirror the challenges seen in business restructuring). In subsequent articles I will explore what we can expect during each of the different phases of the COVID-19 economy in more detail.
Any opinions expressed in this article are those of the author, and not necessarily those of Valentiam Group.