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A Practical Guide for Applying the Arm’s-Length Principle During an Economic Crisis

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The adverse consequences of COVID-19 could be broad, including reduction of consumer demand, supply chain disruption, and an increase in risk aversion in financial markets (driven by an overall downturn in business and consumer confidence). Local subsidiaries of multinational enterprises (MNEs) in affected regions, even those that are operating “business as usual,” may be making a loss or experiencing a substantial reduction in profitability due to this unforeseeable event. Some may find that their operations need to be reorganized, reduced, or relocated. A greater need for intragroup financing and cross guarantees is also possible.

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the TPG) has always served as a key reference point in the application of the arm’s-length principle; the conditions of an unexpected, global economic crisis do not change this.

Indeed, the TPG and most recent guidance issued by the OECD, such as the new Transfer Pricing Guidance on Financial Transactions (the GFT), recognize that an economic crisis can have a wide-ranging impact on transfer pricing (TP) and will pose many challenges and questions for tax practitioners. The GFT therefore provides a series of considerations, practical approaches, and useful tools for dealing with such circumstances.

This article, part of Baker McKenzie and Bloomberg Tax’s Special Report, discusses practical and useful tools, and practical actions for companies following the TPG and GFT.

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Mario d’Avossa is a partner in the Firm's Milan office. He is a seasoned transfer pricing practitioner who has extensive experience in international business restructurings, economic valuations and benchmarking analyses of intercompany transactions in support of documentation and planning studies. He worked in the transfer pricing group of a Big 4 firm before joining Baker McKenzie.

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Philip Thomas is an Associate in Baker McKenzie's Washington, DC office.

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Claudine Fox is a senior tax advisor in Baker McKenzie's Washington office. Claudine is a chartered accountant and before joining the firm in 2017, Claudine worked in the international tax services and transaction tax groups of Big 4 accounting firms for 9 years.

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Maria Fernanda Trujillo is a member of the Latin America Transfer Pricing Group. With over seven years of experience, she focuses her practice on transfer pricing matters, comprising compliance, planning, transfer pricing audits, business restructuring and advance pricing agreement (APA) procedures. With considerable experience in transfer pricing consulting, her knowledge involves projects in jurisdictions over several countries across the Latin America region. Ms. Trujillo is also seasoned in the pharmaceutical industry, and has comprehensive experience in advising companies in the food, auto parts and textile industries, as well as from the insurance and securities sector, full service banks, investment funds, among others.

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Moisés Curiel heads Baker McKenzie’s Transfer Pricing and Valuation practice in Mexico. He has more than 24 years of experience in transfer pricing and international taxes. Moisés served as the transfer pricing audits and resolutions administrator of Mexico’s Ministry of Finance and Public Credit for almost eight years. He helped to prepare and implement various transfer pricing rules in Mexico, including the Income Tax Law, the Temporary Tax Ruling and the Federal Tax Code. He also led the country’s Advance Pricing Agreements Program and conducted the first transfer pricing audits in Mexico and in Latin America. He has also proposed amendments to legislation on various matters for Latin American countries, and represented Mexico before the OECD. Since 2003, he has been recognized for his practice by International Tax Review. He is tax counsel for the maquiladora industry and the Employers’ Confederation of the Mexican Republic. Moisés is also a professor and coordinator in the Transfer Pricing specialization in conjunction with the Universidad Anáhuac and European School of Business for five generations.

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James Wilson leads Baker McKenzie's global Tax Planning, Transactions and Tax Policy group. He has 18 years of experience in advising the world's largest multinational corporations on cross-border tax matters. James is a recommended lawyer for International Tax in Legal 500 USA, in particular for his expertise in advising clients in the consumer goods and retail sector. James is a member of the Firm's Consumer Goods and Retail Industry Group steering committee.

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Andrew O'Brien-Penney is a director of economics in Baker & McKenzie Consulting LLC in Chicago. He has experience in transfer pricing and valuation matters, assisting major multinational companies on a variety of engagements, including advising clients in audit and dispute resolution situations, supply chain restructuring, planning, advance pricing agreements (APAs), and intellectual property migration opportunities. Andrew's experience covers several industries including pharmaceuticals, medical devices, financial services and automotive.

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Shanwu Yuan assists large multinational enterprises with operations in China and elsewhere on various transfer pricing issues, in particular advance pricing arrangements (APAs) and mutual agreement procedures (MAPs). He also works on other Chinese tax issues, including interfacing with the Chinese tax authorities on behalf of taxpayers.

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Gustavo Sanchez is a member of Baker McKenzie's Tax Practice Group in Bogota. He joined the Firm in 2004 and was responsible for the transfer pricing practice in Baker McKenzie's Caracas office, collaborating on local and regional consulting projects and transfer pricing compliance from 2004 to 2006. He has been awarded the Tlacaelel National Award for Economics Consulting, the Inter-American Award for Research on Social Security, and the Consuelo Maeyer Award in Economics Research. Gustavo is currently responsible for the transfer pricing practice in Colombia and the Andean Region.

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