The paradox of transfer pricing

Our International Tax and Transfer Pricing partner Paolo Besio comments on the importance of Transfer Pricing policies in the current changed economic environment.

"The economic situation we have been going through for a few weeks is having a significant impact on the business world, both in the short term and in the medium-long term. Specifically, in the short term, due to the suspension of production activities, unavailability of raw materials and semi-finished goods, renegotiation or annulment of commercial and financial agreements. Businesses are thinking about how they can re-define their organizational, productive and commercial structure, in order to try and start again, as soon as this will be possible.

When plants will re-open and commercial activities will be restored, some problems will certainly be solved, but other ones will remain. Paradoxically, this situation risks to be more severe for business groups.  In fact, though the actual costs and losses incurred in the relationships with unrelated parties due to the crisis will certainly never be questioned, the same costs and losses incurred in relationships between a group’s related parties will be carefully verified and denied, either totally or partially.

Tax authorities, that have currently suspended their activities, will restart their inspections and pressure on public budgets will lead to an aggressive approach, with the aim of recovering revenue. Unfortunately, this is exactly what happened after crisis situations in the past years. Transfer pricing policies will be, again, instrumentally considered as illegal tax planning mechanisms and, thus, deserving no protection.

Therefore, in this moment, although there are other priorities and budgets are reduced to their minimum, it is still important to carefully analyse transfer pricing policies, in order to adjust them to the changed economic context and collect all information and all documents that will have to be included in the TP documentation, which is more important than ever today to defend licit and necessary strategic choices tomorrow. The paradox is that company groups will be charged with the choices that all businesses are now adopting in their third-party relationships.

Hopefully, an adjustment in the regulation or in the standard practice will be introduced, providing that all transfer prices adjustment proposals in FY 2020 must be approved by a central team, to be created within the Tax authorities’ department for advance pricing agreements and international disputes, which, due to their competence and authority, would be able to ensure impartial analyses. A first step in this respect was taken when there was the need to analyse the suitability of TP documentation for penalty protection purposes: now it’s time for a leap, of course strengthening the dedicated personnel properly."