Wed, Apr 1, 2020
The world is currently witnessing the devastating impact of the novel coronavirus (COVID-19), with the World Health Organization (WHO) now declaring it a global pandemic. The COVID-19 crisis is causing substantial shifts in financial markets and the macroeconomy, with direct implications for global supply chains and profitability, across most industries and geographies. The impact will be exacerbated in the coming weeks and months, as governments have placed unprecedented restrictions on the movement of people as a measure to delay the spread of the virus.
This article sets out the impact of coronavirus on global supply chains of Multinational Enterprises (MNEs) and the likely transfer pricing challenges.
Some of the measures taken in China to slow the spread of the virus have had and will continue to have enormous flow-on effects globally. These include:
The highly integrated and complex nature of global supply chains means that a slowing or ceasing of production in China has an immediate impact on the entire supply chain for many MNEs. For example, the limited availability of Chinese-made auto parts and components is directly impacting parts distributors globally and now directly impacting production capabilities of automakers in Japan, Korea and the U.S.
While companies take stock of the impact of these measures on their bottom line, one likely outcome in the medium to long-term may be a further restructuring of business models and supply chains, to diversify procurement activity and to establish alternative manufacturing bases away from, or complementary to, mainland China in locations such as Vietnam, Bangladesh and Cambodia.
This will not address the economic impact of the coronavirus; indeed, at the time of writing, there are indications that the spread of the virus has been curtailed in China. However, it is intensifying in countries such as South Korea, Italy, Iran and the U.S. In recent years, labor cost pressures and the trade war with the U.S. have already led to some shift in focus away from China. However, the coronavirus has served as a blunt alarm bell for MNEs that long term prosperity depends on a reduced concentration of the supply chain in one or a limited number of countries and more focus on diversification of supply and demand markets.
From a transfer pricing perspective, changes in the macroeconomy and expected supply chain realignment as a result of the coronavirus will impact in the following ways:
It is becoming evident that the economic impact of COVID-19 will be felt long after the health risks have subsided. The disruption to China-centric procurement and manufacturing and its impact across the supply chain of MNEs will accelerate efforts to diversify the global footprint, to better manage and hedge such risks in the future. Supply chain adjustments and the broader economic impact of COVID-19 need to be fully aligned with the transfer pricing model. Additionally, the appropriate framework should be in place to manage compliance needs and the inevitable tax authority scrutiny going forward.
Read Transfer Pricing Times – First Quarter 2020
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