Undoubtedly, the world has been significantly impacted by the sudden outbreak of the novel coronavirus disease (COVID- 19). Surely in years to come, the world will be divided into Pre-COVID-19 and Post-COVID-19 eras.
From an economic perspective, the COVID-19 global economic crisis has been viewed by many as the worst since World War II. Governments have had to seek an optimal balance between implementing COVID-19 containment measures to curb the spread of the highly contagious disease and managing the adverse impacts of the containment measures on the economy. Focusing on the latter, the International Monetary Fund (IMF) based on an assumption that most global economies, including Nigeria, will have their economies fully opened by the second half of the year, projected a 3% contraction of the Nigerian economy this year. This adverse economic impact of COVID-19 has obviously hurt the businesses and the financial results of Multinational Enterprises (MNEs) and Group Companies.
Specifically, restrictions in economic activities due to partial lockdowns in Lagos, Abuja and Kano, ban of large social gatherings and border closures by global economies have resulted in significant decrease in the demand for goods and services of most businesses, decreased supply of some products due to disruption of global supply chains, depressed oil prices, amongst others. As a result, most businesses have experienced significantly reduced revenues and profit margins and in some cases have had to borrow significantly to sustain their businesses during this crisis period.
MNEs and other Group entities with related party transactions that have been impacted adversely by COVID-19 may have their transfer prices impacted too. For example, some businesses with significant related party transactions that were expected to make some positive profit margins may be recording significantly lower margins or even losses during this COVID-19 period. Others may have significant related party debt and need to ascertain whether the interest rates charged are reasonable from an arm's length perspective. They may also need to ascertain whether they can claim all the interest deductible for tax purposes under the current Finance Act.
Thus, this article reviews the Transfer Pricing (TP) issues brought about by the COVID-19 pandemic and evaluates the options available to taxpayers to help manage these issues/risks.
Key TP Challenges of COVID-19
Supply Chain Disruptions: The lockdown of countries to control the spread of COVID-19 has limited both cross-border and local movement of goods and services. Entities reliant on goods imported from related parties for resale or manufacturing purposes have therefore been heavily affected. This is especially true for businesses in the Manufacturing and Trade industries.
Originally Published June 2, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
