Limited-risk distributors and intra-group service providers: Should you adjust your transfer prices in connection with COVID-19?

As multinational groups face unprecedented negative economic pressures, transfer pricing understandably might not be on the top of priorities.

However, transfer pricing policies will potentially need to be modified to consider the financial and economic impact of COVID-19 when companies finalize their transfer pricing adjustments, to comply with local jurisdiction requirements and be in line with the arm’s length principle.

This is particularly true for companies that have a transfer pricing structure involving limited-risk distributors or services centers, as the profitability of such entities is generally constant from one year to another. The reason for this is that these entities assume limited risk.

Challenging transfer pricing structures

In fact, limited-risk distributors are named this way because they are usually exposed to general market risks, but are not exposed to significant risks with respect to inventory, credit and collection, product liability or foreign exchange.

On the other hand, entities that act as service providers for the benefit of other entities of their group are usually remunerated on a cost plus basis, meaning that their profitability is equivalent to the markup they applied on their costs. Accordingly, these intra-group service centers are not exposed to risks other than general market risks.

The negative impact that the COVID-19 will have on the profitability of many companies challenges these intercompany structures and will need to be reflected in the transfer pricing adjustments for fiscal year 2020.

Although negative results are caused by extraordinary circumstances, they are part of the market risks that should be shared between all entities of a group, including limited-risk distributors and intra-group service providers.

Determining profitability

The profitability of limited-risk distributors and intra-group service centers is usually determined by applying the transactional net margin method and by performing a benchmarking analysis of public companies that have a comparable functions, risks or assets profile.

The profit-level indicators of the companies selected as comparables (operating margin, markup on total costs, return on operating assets, etc.) are used to establish an arm’s length range, and the profitability of the limited-risk distributor or service center is considered to be arm’s length if it falls within this arm’s length range.

When the results of a limited-risk distributor or service center are outside the arm’s length range, transfer pricing adjustments are booked, either at year-end or during the financial year.

The financial results of the public companies used to benchmark the profitability of limited-risk distributors and group service centers will be impacted by COVID-19. The annual financial results of the comparable companies for 2020 will be available in the first half of 2021, and it might be too late for companies to adjust their transfer prices at that time.

While this delay in the availability of financial information might not be an issue in normal times, when the arm’s length range does not vary significantly from one year to another, this could become an issue for the fiscal year 2020.

Look at the quarterly results of the public companies

In these circumstances, a solution could be to look at the quarterly results of the public companies used as comparables and assess the impact of COVID-19 on their profitability in the first half of 2020. The transfer prices of limited-risk distributors and intra-group service providers could then be adjusted to reflect the decrease observed in the market.

These adjustments should be carefully documented by the multinational groups, and reflected in their transfer pricing documentation for fiscal 2020 and beyond. Such documentation will be important to explain changes in transfer pricing policies to tax authorities in the event of an audit, and to explain potential losses for limited-risk distributors and intra-group service providers.

Next article

Nicolas Plante
Partner | B.B.A., MGP, PMP | Management consulting

Following numerous requests from the municipal sector for this level of government to be recognized as a true development partner and stakeholder, Bill 122, assented to in June 2017, confirmed this status by giving municipalities new powers.

The Act grants new powers to municipal governments enabling them to generate additional revenues and act with greater autonomy.

Let’s take a look at these new tax and financial measures and see how certain municipalities have chosen to apply them, among others, to non-residential and residential buildings, particularly with respect to transfer duties, commonly known as the welcome tax.

Read this article (in French) in the magazine published by the Corporation des officiers municipaux agréés du Québec (COMAQ).

28 Apr 2020  |  Written by :

Nicolas Plante is a partner at Raymond Chabot Grant Thornton. He is your expert in management...

See the profile

Next article

The novel coronavirus (COVID-19) pandemic is spreading around the globe rapidly. Entities need to carefully consider the accounting implications of this situation.

Under International Financial Reporting Standard (IFRS) IAS 36, Impairment of assets, an entity is required to test its assets such as property, plant and equipment, intangible assets and goodwill for impairment when indicators of impairment are present. In addition a mandatory annual impairment test for goodwill and intangible assets with indefinite useful lives must be performed.

Indicators of impairment may appear as a result of the economic conditions caused by the spread of COVID-19 and an entity may be required to perform an impairment test, and record an impairment loss, during an interim period in 2020.

An entity may recognize an impairment loss in one period but, in a subsequent period, there may be an indication that the impairment loss recognized in the prior period may no longer exist or may have decreased. In such cases, IAS 36 states that an impairment loss recognized in prior periods for an asset other than goodwill should be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized.

Read our Adviser Alert below for more information.

Next article

Katy Langlais
Manager | CRHA, MBA | Human resources consulting

The way we work has changed in the past few weeks. Since remote work has proven to be an effective solution for many businesses, this new arrangement is here to stay. We need to adjust.

Have your employees been working from home during the crisis? If so, your business recovery plan will have to reflect this new work arrangement, including all the pros and cons that have become apparent in recent weeks.

Working from home has forced employees and managers to be flexible. In the coming weeks, businesses will have to make adjustments in order to maximize the benefits and mitigate the drawbacks of this new approach.

Adjusting to remote work

Work-from-home arrangements come with a lot of advantages, especially now that work–life balance has become a priority issue.

On the plus side, remote work allows employees to cut commuting, enjoy flexible hours, fit in errands and appointments more easily. This leads to reduced absenteeism and better productivity.

However, there are a few notable issues that businesses need to address with viable solutions for the long term. Studies have found that the most serious drawbacks include professional isolation, work spilling over into home life, fewer social connections with coworkers and longer work hours.

SME Solutions - Relance RCGT

Don’t let distance become an issue

To prevent issues arising from unrestricted schedules or a fuzzy divide between employees’ professional and personal lives, we need to find new ways to structure work.

The most common strategies include holding regular meetings (using whatever tech tools are available to you), tracking hours via employee time sheets, and setting project milestones with deadlines.

And remember that the principles for leading effective teams haven’t changed, even though people are at home.

The three pillars are:

  • Have a common goal;
  • Create a positive and friendly work climate;
  • Establish structured processes.

Standardize your processes, but make sure you enlist the help of employees in developing and adjusting these as needed.

Even though teams are working remotely, deliverables should still be checked and approved daily. Emails are often enough, but video calls are sometimes better because they motivate employees to organize their work space, get dressed for the day and shift into work mode.

Keep the lines of communication open

Active listening and communications should still be your top priorities. Managers should make establishing effective lines of communication a priority so that employees can reach out as needed. This will prevent people from feeling disconnected. One-on-one and team meetings are also needed to share information. If an employee isn’t in the loop, they can end up feeling ineffective.

Ultimately, these measures aim to keep employees engaged and focused on achieving their personal goals and the business’ objectives.

Create a safe work environment

Employers are responsible for protecting the health and safety of their workforce, even if employees are working from home.

If remote work becomes the new norm, you may need to schedule videoconferences to check that your employees have safe and ergonomic work stations. Meanwhile, it’s up to employees to report work-related injuries or illnesses. This is where mutual trust comes in.

If you haven’t already done so, it’s time to develop a health and safety policy specific to working from home. It should cover the following:

  • The employer’s right to access the employee’s remote work space;
  • Who provides the employee’s devices and office supplies;
  • Which part of the home may be used as the employee’s work space;
  • The employee’s obligation to report work-related injuries to their manager as soon as possible;
  • Applicable terms of employment, including regular work hours and overtime;
  • How this policy ties in with the employer’s other policies.

Make use of available technologies

Managers will have to adjust to new work environments and to their employees’ needs and living arrangements. It makes sense to provide leaders with assistance, especially if this is their firs experience managing a team remotely.

Not all employees are comfortable using the different technologies out there, and the company has to make sure that its IT systems are secure and that employees are using tools properly.

Did you know that?

An employer may reimburse an employee up to $500 for the acquisition of computer equipment allowing the employee to work from home, with no taxable benefit for the employee.

You may want to offer remote training on how to use tech tools effectively

While some staff members might have a hard time with certain technologies—like videoconferencing—they’ve got to get past that hurdle because email isn’t always enough.

You can get financial assistance to train your workforce.

Plan the change

Proper planning is needed if your business wants or needs to make remote work a long-term practice. There are a lot of factors to consider, all of which are important for ensuring seamless and secure business continuity.

Keep in mind that even though working from home requires flexibility and proactive management, it could be the key to helping your business recover from the crisis.

27 Apr 2020  |  Written by :

Katy Langlais is a recruiting and human resources consulting at Raymond Chabot Grant Thornton.

See the profile