The current outbreak of COVID-19 has become one of the greatest threats to health, the global economy and financial markets in recent history.
In the current environment, multinational companies and groups will have to work more and more efficiently to manage their supply chains in a rapidly changing environment due to the restrictions imposed by COVID-19. In most cases, this will require monitoring and documenting temporary changes due to the crisis; however, in other cases, the current situation may imply the definitive restructuring of the operations and intercompany relationships within the Business Group in order to guarantee its future sustainability.
Some of the impacts that companies face and will face this year include: Changes in supply chains; Changes in the value chain of multinational groups; Decline in overall revenues and profits in non-essential industries; Significant impact on the value of tangible and intangible assets; Impact on the productivity of companies; and Decrease in cash flow of companies belonging to multinational groups and operating in areas affected by the outbreak; among others.
In this context, the change in economic conditions, the change in business models and the aspects mentioned above will have consequences in terms of transfer prices for multinationals. Some of the most significant impacts are listed below./p>
Changes in current transfer pricing policies that effectively reflect risk taking between members of the business group and adverse macroeconomic shocks. Changes in operating models to achieve alignment with changes in the global supply chain. These changes include, for example, the temporary reassignment of business functions to limit the spread of COVID-19, the change in the Group’s management headquarters as a result of travel or staff mobility restrictions, etc. Financial restructuring or new intercompany financing agreements. Current intercompany loans may be restructured to reflect new interest rates prevailing in the market or to extend the term of intercompany loans. Likewise, new intercompany financing agreements or agreements with third parties could arise with the aim of covering the immediate liquidity needs of the members of the Business Group. In this sense, it is important not only to consider compliance with the arm’s length principle of the terms and conditions applicable to financing, but also the fiscal impact of these agreements as a result of the new rules limiting the deduction of interest applicable in Mexico and in other countries. jurisdictions. Cross-border business restructuring. The current situation will inevitably lead to business changes and restructuring to deal with the global economic situation. These business restructurings have historically been the subject of scrutiny by the tax authorities, so it will be necessary to properly analyze and document any restructuring. From the Mexican perspective, these restructurings could constitute a reportable scheme in accordance with the provisions of Chapter VI of the Federal Tax Code, for which it will be necessary to analyze and document any change in the operating model or in the assignment of functions, assets and risks of the business group. Changes in the economic terms and conditions of intercompany relationships and with third parties. Given the current situation, it is likely that special negotiations will be carried out between third parties and between related parties to face the adverse economic effects, which could include the renegotiation of contracts; modifications to payment terms; and adjustments to sales prices, among others. In these cases, it will be necessary to document and modify said contractual terms and give a certain date to the document so that the taxpayer has the supporting documentation and necessary future defense tools.
Considering these and other implications, it is necessary to carry out a detailed analysis of the conditions, changes and economic impacts of the operation of Multinational Groups in order to mitigate transfer pricing risks such as: i) the creation of fiscal income ghost which are generated solely as a result of the application of transfer pricing policies but that do not correspond to the economic reality of the group; ii) the creation of transactions or restructurings that are considered as reportable schemes; and iii) the implementation of atypical business strategies that may not be considered to have a business reason as currently established by law. On this last point, it is relevant to consider that these are extraordinary times that warrant extraordinary measures and in this sense, obtaining an economic benefit is less relevant than guaranteeing the future survival of the companies.
Although the impact of COVID -19 on our lives and productive activities is still difficult to measure quantitatively, it is prudent and advisable to model the impact of COVID-19 on operating results now and in the coming months, in order to mitigate potential risks in terms of transfer prices and that at the same time are tools for planning decisions for times to come.