Asia's Response to the COVID-19 Impact – Transfer Pricing Documentation, Benchmarking and APAs

The impact of COVID-19 on global supply chains and profitability to date has been extensively documented throughout 2020. Multinationals are revisiting their transfer pricing models in response to this and building up a defense file to help support the decisions taken and changes implemented.  

From an Asian tax authority perspective, unprecedented fiscal stimulus has placed considerable pressure on government budget positions, and we are witnessing a ramp up in audit activity and tax collection drives across the region in response.

The OECD is developing guidance for multinationals to provide a framework for transfer pricing documentation and benchmarking in the COVID-19 era, which is expected to be released in the coming months. However, timing is critical and being able to contemporaneously assess transfer pricing positions, make adjustments and gather supporting evidence as changes occur in the business is crucial.  

Various Asian tax authorities, including those in Singapore1, Australia2 and New Zealand3, have released guidance on this topic, all following a broadly similar format. This article summarizes the key aspects of the guidance relating to documentation, benchmarking and advance pricing arrangements (APAs) and some of our observations on what this means for taxpayers in Asia.

The Guidance


In documenting their specific facts and circumstances considering COVID-19, businesses are encouraged to:

  • Prepare a broad analysis of how the broader industry has been affected by COVID-19
  • Include a comparison of the budgeted (pre-COVID-19) and actual results of the company as a whole, providing explanations and evidence to support the variances at the group and local level
  • Document relevant group and local entity responses to COVID-19, including for example, any changes in business strategies, characteristics of product or service offerings and so forth, and how those impact financial results
  • Identify and explain any changes in the group and local business functions, assets and risks during the impacted period, including how these relate to the exposure to, or mitigation of, COVID-19 impacts. This should include documentation of who and which entity within the group made decisions relating to management of COVID-19- related risks. This information will help indicate which entities are in control of the decisions and thus should bear the related financial impact.
  • Discuss any changes in the contractual arrangements between the entity and its related parties, and if any obligations or material terms and conditions have been varied, amended or terminated
  • Document details relating to government assistance that the company has received or government regulations imposed on the company that have impacted profitability



The guidance generally acknowledges the exceptional nature of the circumstances surrounding COVID-19 and the recognition that in the absence of timely comparable data, we need a pragmatic approach.

The tax authority’s goal is to understand the financial outcomes the taxpayer would have achieved “but for” the COVID-19 impact. The financial analysis to supplement the benchmarking study should therefore include, where applicable:

  • A detailed profit and loss analysis showing changes in revenue and expenses, with an explanation for variances 
  • Details of profitability adjusted to the outcome expected, if COVID-19 had not occurred. This should consider all factors that have a positive or negative impact on profits and should be supported by evidence, i.e.: 
    • Why local sales are lower than expected
    • Why local expenses are higher than expected
    • Any unusual financial items
    • Any government assistance received
    • Impact of any amended intra-group transactions
    • Any adjustments made

The Singapore guidance is more limited than the others in this respect and focuses on the concept of “term testing,” i.e. testing the results of the taxpayer over multiple years (typically three) to smooth out volatile results in one year. Traditionally, the Inland Revenue Authority of Singapore (IRAS) has had a firm preference for one-year testing. However, owing to the pandemic, the IRAS has stressed that “term testing” can be considered, albeit as a one-off event for a taxpayer, with consideration given to the impact on the counterparty of the transaction as well.  


The guidance covers taxpayers with existing APAs in place and those currently in the application process.

The New Zealand guidance does not specifically cover APAs, but the Singapore and Australian guidance follow a similar approach4:

  • For existing APAs, if a taxpayer is materially impacted by COVID-19, they should review the critical assumptions and assess if there is a breach of those assumptions. If so, both tax authorities encourage the taxpayer to proactively approach them to discuss if it makes sense to continue, as usual, re-negotiate or suspend the existing APA for a set period. In the case of bilateral/multilateral APAs, there will be an additional layer of discussion required with the other tax authority/authorities.
  • For those currently in negotiation, both tax authorities commit to continue working with the taxpayer and honor any commitments made. However, if a business is significantly impacted or outcomes are highly uncertain, the taxpayer should consider mutually ending the process or placing the APA negotiation on hold until business returns to a more sustainable position.


Thinking Ahead

The release of the guidance above highlights the common thinking emerging among Asian tax authorities regarding how to best navigate the COVID-19 transfer pricing landscape. Given the tax authorities referenced have a reputation and history of being both proactive in responding to new tax trends and are influential on their tax authority peers across the region, we expect that to some extent other tax authorities across Asia will explicitly or implicitly adopt similar approaches and tone, in addressing COVID-19-related transfer pricing matters.

What this accentuates for the taxpayer is the need for a comprehensive and up-to-date functional analysis, and intercompany agreements and comparability studies fully reflecting the impact of COVID-19 and its impact on the supply chain, risk allocation and profitability.  

An analysis of supply chain factors and reallocations within multinational companies (MNCs) may reshape transfer pricing policies is beyond the scope of this analysis. However, from a practical perspective, as we approach  December 31, the end of the fiscal year for most Asian taxpayers, the following actions are worth noting:

  • Evidence: Merely documenting and demonstrating that the business has missed its sales targets due to COVID-19 will not be enough to demonstrate that those outcomes are still arm’s length. A rigorous analysis of the impact of the pandemic on the taxpayer’s decision- making processes, specific marketing strategies, sales, product mix, staff levels, cost structure and mix of related party and third-party business will be required.
  • Limited risk operations: Where a limited risk and profit return model is employed, considerations should be applied to whether a limited risk operator is still expected to be profitable, even when there is a catastrophic hit to group profitability, and whether potential market support payments are appropriate for underperforming subsidiaries. 
  • Benchmarking: A common question is how to use economic benchmarking studies to support the returns derived during COVID-19, especially given the lag between the availability of tested party and comparable company data. Initial suggestions include reviewing pre-COVID budgets and preparing detailed “but for” scenario modelling.
  • Service fees: Taxpayers should review the operation of intercompany service charges, including consideration of any changes to the make-up of the cost pool and the continued appropriateness of the pre-COVID-19 allocation key. 

One encouraging aspect of the guidance is that it reflects a recognition from tax authorities that COVID-19 is a unique event that has profoundly impacted transfer pricing models and profitability. It also demonstrates a willingness from them to work collaboratively with taxpayers to better understand the impact on specific businesses. Notwithstanding this, there have historically been distinct differences in the approach of tax authorities across Asia, so we should expect to see that inconsistency again. As mentioned in the introduction, fiscal pressures to fund stimulus measures are being answered by increased audit activity in China, Indonesia, Malaysia and Cambodia.  

The OECD is expected to release its own guidelines on how tax authorities and taxpayers should manage their transfer pricing documentation and benchmarking in this challenging environment, which will be relevant in Asia and globally. Taxpayers will still need to analyse their own specific facts and circumstances in the context of that guidance and establish transfer pricing positions and outcomes that they consider to be arm’s length and they can support. As part of this process, taxpayers need to establish a robust audit trail and consider any realignment and adjustments to pricing, review and update their intercompany legal agreements, and revisit their benchmarking analyses before year-end.

Read Transfer Pricing Times – Third Quarter 2020

4.In addition, the Inland Revenue Board of Malaysia published a series of FAQs on APA treatment during COVID-19, on June 16, 2020. The responses cover new applications, ongoing APAs and APA renewals and are broadly in line with the Singapore and Australian guidance.

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