Addressing The Economic Downturn Under Existing Transfer Pricing Methods.

Extract

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Addressing The Economic Downturn Under Existing Transfer Pricing Methods.

Tax Notes International, June 22, 2009

The period from the early 1980s through mid-2008, during which many transfer pricing methods and their application matured, was one of generally strong profitability for multinational companies. Although there were downturns, most were shallow and short-lived and created no unusual transfer pricing challenges. Companies could develop transfer pricing policies with the knowledge that compliance issues would mainly involve selecting the best method for measuring results and identifying uncontrolled comparables used to benchmark those results. In an environment characterized by healthy profits and steady economic growth in most countries, there was little concern that increasing the profits from controlled transactions in one jurisdiction might create a loss in another jurisdiction. Business cycles continued and companies did incur losses, but downturns generally could be dealt with through existing transfer pricing principles. The current economic downturn, in contrast, is bringing several basic transfer pricing issues to the fore. These include the ability of controlled taxpayers to modify existing advance pricing agreements to take account of adverse business conditions and to change their existing business structures, including long-standing allocations of risk. Controlled taxpayers and practitioners are also devoting greater attention to the transfer pricing analysis of events (or costs) such as plant closures, scale-down of operations, and employee separation. To some extent, these issues dovetail with a broader debate that is under way concerning taxpayers' ability to modify their existing business arra...

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