How Transfer Pricing Can Improve Your Cash Position During the Covid-crisis
The world is currently facing the worst economic crisis since the Great Depression due to the COVID-19 pandemic. Many countries are still struggling, while other countries are more or less controlling the virus without paralyzing lockdown measures. Companies are facing entrepreneurial risks unimaginably big compared to only a year ago. With the crisis far from over and a quick recovery being unlikely, many companies are struggling to keep cash within the company.
Transfer pricing is not the first thing that would spring to mind when considering your cash management, but it definitely helps. The earlier you find time to look into it, the better the results will be.
Here are a couple of ways how transfer pricing can improve your cash position during the COVID-19 crisis:
- Review the terms and conditions of your intercompany contracts
The COVID-crisis has led some companies to review and revise the terms and conditions of the contracts that they have with their suppliers and/or customers. The arm’s length principle, the leading principle in transfer pricing, states that: where conditions are made or imposed between the two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, that should be adjusted.
If independent enterprises are reviewing and revising the terms and conditions of their contracts, then the ‘at arm’s length’ thing to do would be to also review and revise your intercompany contracts in a similar way.
- Review and adjust the results of your benchmark studies and other economic analyses
To support your transfer pricing you may have had a benchmark study performed. Usually these studies need to be updated periodically to (better) reflect the present market conditions. But even the newest benchmark studies will not yet accurately reflect the current bizarre market conditions.
During a bad crisis, you do not want to determine an at arm’s length profit by referencing the market conditions of last year or the years before. The market has completely changed. We can help you to report (lower) profits that are better aligned with current market conditions and use that as a support towards the tax authorities.
These are just a few tips that you can apply to hopefully avoid more cash leaving your business than what is strictly required. Please note that these tips are generally good practices of operational transfer pricing, also outside of an (economic) crisis.
If you found these tips valuable and want to know more, please feel free to contact the transfer pricing specialists at Crowe Peak without any obligations.