Coronavirus is primarily a health problem, but it also has huge economic implications. When it comes to economic issues, tax is never far behind.
SMEs impacted by the coronavirus will be waiting with bated breath to see if the Chancellor announces time-to-pay reliefs. At the larger end of the corporate scale, multinationals will need to think about where any losses, or indeed profits, arising as a result of the coronavirus should be reflected.
Earlier this week, the stock market experienced its worst day since 2008 due to a combination of oil price wars and the COVID-19 epidemic. Although some stocks have bucked the trend, many are suffering supply interruptions, particularly from China, and are trying to manage stock levels as a result.
Other sectors such as hospitality and travel are suffering a demand shock, as holidays and events are cancelled and people choose not to go to restaurants for fear of contamination.
While it is clearly not their top priority, finance teams will be required to consider the impact of the outbreak on transfer pricing.
Coronavirus creates costs for businesses, either from loss of revenues or from extra spending. However, the most appropriate place for these losses to be relieved in a multinational group may not be the entity which suffers them directly. This will depend on the transfer pricing policy in place, the facts and circumstances of the business, the overall impact on a business and where the business risk generally resides.
If supply and stock risks are managed centrally, it may not be appropriate for the downside costs of the stock risk to sit locally with the distributors.
If risk is not centralised, leading to lower profits or losses locally, this position will have to be defended as tax authorities could be expected to open enquiries. Affected businesses will therefore need robust documentation that addresses the business model and transfer pricing policy clearly.
The roles and responsibilities of senior finance people may also be flexible during a period of financial uncertainty. If more senior people become involved as a result of the losses being incurred and these people are in a different location, this could alter where the risk has to be recognised.
Amidst the disaster recovery work, corporations will need to start thinking about how best to track and evidence the business’ response – what is related to central factors, what are local factors (for example, retail sales in Italy may take a greater than average dip), what is happening in the industry generally and how can this be evidenced?
The use of target margins may need to be considered in the context of industries, territories and potential comparable uncontrolled price information. There may come a point (as was the case with the automotive industry in 2008-2010) where risk becomes shared across the value chain with more routine entities willing to share in a hit to preserve a major trading partner (either supplier or customer).
In short, one size will not fit all when it comes to business’ response to COVID-19 – and the associated tax impacts.