OECD recommendations on comparability analysis during Covid-19 (Part 2)

Covid-19 has brought unprecedented social and economic challenges that will durably impact the world economy.

Specifically, the pandemic has surrounded the Multinational Enterprises (MNEs) with many issues to be managed such as:

  • insufficient cash flows,
  • unpredictable profitability,
  • unreliable third-party data (which is at the heart of arm’s length principle),
  • non-operative supply chains,
  • import/export limitations,
  • possible termination/amendment needs in the intragroup service agreements etc.

In this uncertain environment, an action was eagerly awaited from the Organisation for Economic Co-operation and Development (OECD), which works cooperatively with many country administrations and group companies and has an important role in forming a global consensus on transfer pricing. In this respect, on 18 December 2020, the OECD released a guidance on transfer pricing implications of Covid-19 (the Report).

The Report focuses on four major issues which have been high on the agenda of taxpayers during the pandemic.

  • (i) Comparability analysis
  • (ii) Losses and the allocation of Covid-19 specific costs
  • (iii) Government assistance programmes
  • (iv) Advance pricing agreements (APAs)

With the opening of the new financial year, MNEs have calculated their transfer prices for 2021 based on their current transfer pricing policies. However, under Covid-19 environment, taxpayers may wonder whether the comparability results reflect the independent entity behaviour.  Benchmark analysis is at the very centre of transfer pricing analysis and MNEs have been facing the below challenges on which OECD has provided guidance.

5. Can data from other crises be used to support pricing?

This question has been hotly debated by many parties. According to the Report, a comparability analysis based solely on financial information from the 2008/2009 global financial crisis would raise significant concerns (despite the obvious superficial similarities between that crisis and the current pandemic), given the unique and unprecedented nature of the Covid-19 pandemic and its effect on economic conditions, as well as the varying impact by business sector of the 2008/2009 crisis.

6. How might the period of data used to evaluate arm’s length pricing be established to support a comparability analysis?

The Report indicates that although the use of multiple year data and averages may be advantageous in ordinary circumstances, care should be given in the evaluation. Comparability data pertain to the pandemic or for the period when certain material effects of the pandemic were most evident. In this manner, it may be appropriate to have separate testing periods (and periods considered for price setting) as long as the data from independent comparables can be measured over a similar period in a consistent manner. This includes considerations relating to the effect of government interventions on business operations and imposed restrictions or conditions. If such interventions are identified, it may be necessary to adjust the period over which the comparison is performed.

7. Would price adjustment mechanisms be appropriate?

According to the report, such a price adjustment mechanism should definitely be permissible in domestic law, even temporarily. Through such a mechanism, prices for the current year would be adjusted in a later period when more accurate information to establish the arm’s length transfer price becomes available. If it is considered consistent with the arm’s length principle to apply such a mechanism, the related adjustment should be appropriately characterised, any effects that the payment may have on the comparability analysis for FY2021 should be considered, and their potential resulting Value Added Tax/Goods and Services Tax and customs duty implications should be analysed.

8. What actions may be taken to evaluate the set of comparable companies or transactions used

Where taxpayers roll forward their existing set of comparables, a review may be necessary to validate their continued comparability, and revisions made to the comparables set if required such as reviewing the geographical acceptance criteria considering the effects of Covid-19 in a particular market.

9. Can loss making comparables be used?

This issue has also been discussed specifically for routine or limited risk companies. According to the Report, when performing a comparability analysis for FY 2020, it may be appropriate to include loss-making comparables when the accurate delineation of the transaction indicates that those comparables are reliable (e.g. the comparables assume similar levels of risk and that have been similarly impacted by the pandemic).


Overall, the Report addresses the most important and expected issues while inevitably, there are still many open issues and lack of practical case studies because the economic circumstances caused by the pandemic are evolving over time. Importantly, the OECD underlines the necessity of a constructive and collaborative approach between tax authorities and taxpayers. Regardless of the specific issue, we assume that the opinion of the OECD is very important on the parts of the taxpayers and tax administrations.