Based on the circular 2054/2021 published by the Independent Authority of Public Revenues (IAPR) on March 10 2021, general instructions for dealing with the COVID-19 pandemic effects on issues related to intragroup transactions are provided.
The instructions provided by the IAPR are aligned to the guidance published by the OECD on 18 December 2020, regarding the effects of the COVID-19 pandemic on issues related to transfer pricing (COVID Guidelines). The issues outlined or mentioned in the said guidelines are interpreted based on the OECD Transfer Pricing Guidelines (“TP Guidelines 2017”) or/and based on the OECD Guidelines on the impact of the COVID 19 pandemic on transfer pricing (“COVID Guidelines”). Specifically, the guidelines focus on the four priority areas, which are also covered by the OECD COVID Guidelines, and regard issues relating to (1) comparability analysis, (2) losses and expenses incurred due to the pandemic, (3) government assistance programs and (4) Advanced Pricing Arrangements (APAs).
f transactions that took place during 2020, sources that can be used for retrieving information on the effects of the pandemic on tested transactions may indicatively but not exhaustively include analysis of the change in the volume of sales due to the pandemic, and/or the change in distribution channels compared to sales before the COVID-19 pandemic, analysis of the change in production levels of the group compared to normal production levels regarding intercompany and third party transactions, etc. It is noted that any comparability adjustment performed by liable entities (either regarding the tested transactions prices/profitabilities or comparable data) will need to be quantified and justified as of their adequacy and necessity.
Further to the above, in line with the COVID Guidelines the circular notes that the use of information from previous financial crises (such as the global crisis of 2008-2009) is not recommended, as the pandemic crisis varies in size, characteristics and primarily impact by business sector.
The principles set out in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Chapter III, Section B.5 of the relevant OECD Guidelines) regarding the use of multiple year data and average prices remain valid. However, would it be adequately justified that reference periods should be altered in order to enhance comparability of the available data, reference periods, other than those prescribed as per local rules may be utilized, for documenting transactions that took place during the period when certain material effects of the pandemic were most evident (see paragraph 27 of the COVID Directives).
Finally, as per the OECD Guidelines (Chapter III, par. 3.64) and provided that the based on the detailed description of the tested transactions, lossmaking companies that are reliably considered as comparable are identified, the said entities should not be de facto excluded from the sample of comparable companies, especially during periods when certain material effects of the pandemic were most evident.
Losses and expenses incurred due to the pandemic
Reference is also made to limited-risk entities, for which as per the OECD Guidelines, lossmaking results are not expected to generate losses for a long period of time. Thus, it is recommended that the specific facts and circumstances that could justify whether a limited-risk entity may at arm’s length earn a loss in the short-run, should be adequately examined.
The analysis states that the risks assumed by that entity should be documented since over time the distribution of risks between the parties also determines how profits or losses arising from the controlled transaction are to be distributed, in accordance with the arm’s length principle.
It is important to mention that the tax authorities mention that the use of Resail Price Method could be utilized as an alternative for evaluating whether the losses incurred could indeed be attributed to the special conditions formed due to the pandemic or to other factors. The said approach, though, cannot be followed in cases of limited-risk distributors that do not undertake significant risks that upon realization could lead to lossmaking results.
In addition, given the extraordinary circumstances of the pandemic, the associated parties could, according to the circular, consider revising their agreements (i.e. as independent parties would also be seeking) as long as it is documented whether this revision is in line with the arm’s length principle.
Finally, with regard to the extraordinary expenses incurred by many companies, it should first be justified based in the actual facts and circumstances which entity should bear the said costs, as well as whether such costs should be included on the costs basis of intragroup transactions or be recharged without the application of a mark-up.
Government assistance programs
The circular also states that, regarding assistance programs for facing the consequences of the pandemic, their extraordinary and temporary nature should be taken into account, and thus they should be separated from other similar programs with a more permanent character. The said programs constitute an additional factor affecting market conditions as well as the allocation of functions and risks among contracting parties and thus the availability of such programs, the terms applied, their tenor, their purpose and other factors should be carefully evaluated. The receipt of government assistance may mitigate the impact of economic risks undertaken by the contracting parties in the course of an intragroup transaction, while not necessarily leading to a reallocation of the risks between them. On these grounds, the provision of government assistance both to relates and independent parties should be taken into account in the course of the comparability analysis, while it should also be evaluated whether comparability adjustments should be performed, so as to eliminate or mitigate the effect of different accounting treatment of such programs implemented by the tested party and the independent entities considered as comparables.
Advanced pricing arrangements (APAs)
As regard Advanced Pricing Arrangements (APAs), it is mentioned that they constitute a separate transfer pricing field that is affected by the pandemic crisis. Both arrangements concluded prior the pandemic and applicable for FY2020 (or applicable for post-pandemic years as well), as well as arrangements that are not yet finalized and are expected to be finalized shortly are affected. For addressing any issues arising, a cooperative approach between the taxpayers and the tax authorities is necessary.
Furthermore, it is stated that APAs currently in force, for which no breach of the critical assumptions has been identified, are maintained, otherwise the conditions of the APA should be reviewed. Furthermore, a breach of the critical assumptions may be considered immaterial leading to the maintenance of the APA or in case it is considered material to its revision or cancelation. In cases of bilateral/multilateral APAs a breach of the critical assumptions should be encountered through consultation between involved states concluding to a generally accepted approach.
Finally, as regards APAs that have been filed and are currently under negotiation, taxpayers may take all necessary measures to substantiate the need to revise the applications filed or certain conditions of them, as per the processes followed in case of revision of existing APAs. Additional options that may be considered, as appropriate, are the submission of separate applications for the pandemic and the post-pandemic period, or the conclusion of the agreement for the entire period, including a clause permitting the annual revision of the agreement, if deemed necessary.