© 2020 Tax Analysts. All rights reserved.
Tax Analysts does not claim copyright in any public domain or third party content.
COMMENTARY & ANALYSIS
Transfer Pricing and COVID-19: Loss Allocation for Retailers
by Giacomo Soldani and Andrea Tempestini
Giacomo Soldani is head of tax at
EssilorLuxottica in Paris, and Andrea
Tempestini is a tax partner with McDermott
Will & Emery in Milan.
In this article, the authors offer a proposal to
help multinational entities allocate pandemic-
related losses between retailers and principals
while maintaining a consistent transfer pricing
strategy.
By the end of May, less than six months after it
was first identified, the COVID-19 pandemic had
infected more than 6 million individuals in more
than 180 countries and territories and led to more
than 370,000 deaths. Governments around the
world have reacted to the virus by restricting the
movement of people, shutting down economic
activities, and offering economic support to
companies and individuals. All the major
economies, in particular China, the United States,
and the countries of Western Europe, have been
severely hit by the economic fallout.
Likewise, most multinational enterprises are
suffering amid an uncertain economic
environment that may call for a “new normal” in
the medium term. Most of the retail sector is
facing lost profits and lower sales volumes along
with the expectation that consumers will demand
TAX NOTES INTERNATIONAL, JUNE 15, 2020
For more Tax Notes® International content, please visit www.taxnotes.com.
tax notes international®
price reductions in the troubled post-lockdown
period, not to mention the profound
modifications to their supply channels and ways
of doing business more broadly.
Large deviations in MNE revenues, costs, and
profits raise questions regarding the allocation of
these deviations among the various entities
involved in complex value and supply chains.
While transfer pricing rules and the arm’s-length
principle govern the allocation of profit within
MNEs, neither existing rules nor general transfer
pricing general practice anticipated the unique
situation of COVID-19.
Practitioners have begun to opine about the
allocation of virus-related losses among group
entities, and the OECD has announced plans to
1
publish specific guidance on the subject. Some tax
authorities have encouraged taxpayers to contact
them to identify possible solutions.
This article will add to the discussion by
focusing on the specific effects of the COVID-19
crises on retailers, offering one approach for
allocating the COVID-19 loss among group
entities, and demonstrating the proposed
approach using a sector-specific case study.
While we do not purport to provide a
definitive solution to a complex matter, we will
attempt to offer an approach that combines
analytical rigor and adherence to traditional
transfer pricing rules with pragmatism. In doing
so, we rely on the fair assumption that given the
magnitude of the crisis and its unique
characteristics, one cannot derive significant
insights from past crises, such as the 2008 financial
crisis in 2008-2009 or the SARS epidemic.
1
OECD, “OECD Tax Talks” (May 4, 2020) (the 15th webcast in the
series).
1251
COMMENTARY & ANALYSIS
Focusing on Retailers
Our Hypothetical Retailer
There are myriad retailers in the global
economy, and retail includes several subsectors.
Therefore, we will focus on a hypothetical retailer
that has specific features.
This retailer is part of an integrated
multinational group that oversees the supply
chain from sourcing to manufacturing, marketing
and distribution. The retailer primarily sells high-
end luxury products (clothes, garments,
accessories, cosmetics, and so forth) in its own
shops. Our retailer has the following transfer
pricing characteristics:
• The functional and risk profile of local
distributors in the market has led the group
to select the transactional net margin
method (TNMM) as the most appropriate
transfer pricing method for remunerating
local distributors. This decision takes into
account the centralized model of the group
and the lack of a reliable basis for applying
the comparable uncontrolled price method.
• Before COVID-19, the target margin for
distributors was generally set in light of the
remuneration of comparable companies.
The quality of the comparables and the lag
in financial data available — comparable
data are generally from two years prior —
were not necessarily a problem because
overall net margins seemed reasonable in
light of overall profitability of the group.
Some of the group’s retailers had concluded
advance pricing agreements (unilateral or
bilateral) for securing their tax and transfer
pricing positions.
• Originally, the group expected 2020 to be
consistent with 2019, and prices had been set
accordingly.
The Lockdown Period
From March to May,2 sales levels were close to
zero as a result of lockdowns in major markets.
Many shops closed either as a direct result of local
laws and administrative measures or as an
indirect result of local laws forcing mall closure.
2 lockdown period through the end of 2020. The
March, April, and May are used as the lockdown period for our
hypothetical. We note that actual lockdown periods varied by country.
1252
For more Tax Notes® International content, please visit www.taxnotes.com.
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Some shops closed because of a voluntary
decision by the retailer itself, for instance when
masks or other protective gear were not available
or there was clear perception that very few people
would have come to the stores given the non-
necessary nature of the products sold and the
general restrictions on people’s movements.
In some markets, retailers benefited from
government subsidies to support labor costs.
Overall, the MNEs’ cash shortage has been
partially offset by postponed tax and social
contribution payments, access to state-guaranteed
loans, and government indemnification to
support rental costs during the lockdown and
prevent permanent store closures. Some
businesses elected not to avail themselves of the
full array of government subsidies or abstained
from dismissing employees (even when legally
permitted) for ethical and reputational reasons.
MNEs did experience an increase in their e-
commerce sales. This did not necessarily benefit
the retail entities since often these sales are
directly made and invoiced by the headquarter
entity, with the local entity having no or limited
involvement.
As a result of the above, the profit-and-loss
statement for the lockdown period shows a loss,
the magnitude of which depends on the extent to
which one dollar of lost sales converts into lost
profits. Thus, total losses depend on the specific
cost structure of each individual retailer, its ability
to reduce costs, and the size of public subsidies.
The Post-Lockdown Period
In June retailers slowly began reopening their
shops.
The level of sales may not be at pre-pandemic
levels for several reasons: people’s attitude and
cautiousness, including feelings about the
pandemic and the general economic uncertainty;
limited entry to the shops and potential wait times
may discourage shoppers; and most of the spring/
summer collection is likely to be discounted, with
the retailers expecting almost no full-price sales.
At the same time, the retailers have incurred
several costs to comply with post-lockdown
regulations. Resizing of the operations is limited
because of concerns about the brand’s reputation.
Therefore, the MNE expects a loss in the post-
outlook for 2021 remains uncertain.
TAX NOTES INTERNATIONAL, JUNE 15, 2020

Full-Year 2020
Because of all the foregoing issues, 2020
budget goals may not be hit, and the retailer’s
accounts may show an overall loss before any
transfer pricing adjustment.
The Key Transfer Pricing Questions
From a transfer pricing perspective, we have
identified two key questions:
• Should the limited-risk retailers bear, under
arm’s-length conditions, a portion of the
negative financial consequences of the
COVID-19 disruptions?
• If the first question is answered in the
affirmative (which we and others assume
3 We note the external nature of the risk makes
will be the case ), how should the portion of
this COVID-19 loss that pertains to the
limited-risk retailers, as identified above, be
calculated?
The Arm’s-Length Rule in a Pandemic
Given its very nature, COVID-19 can be seen
as an “extraordinary” hazard risk. In paragraph
1.72 of the 2017 Transfer Pricing Guidelines for
Multinational Enterprises and Tax
Administrations, the OECD defines hazard risk
as:
likely to include adverse external events
that may cause damages or losses,
including accidents and natural disasters.
Such risks can often be mitigated through
insurance, but insurance may not cover all
the potential loss, particularly where there
are significant impacts on operations or
reputation.
COVID-19 presents a hazard risk beyond the
“normal” hazard risks that can be anticipated —
notably, the OECD does not mention the hazard
risk of a pandemic in its definition — and it differs
by size and the simultaneity of its worldwide
impact from the 2008 financial crisis and the SARS
outbreak. COVID-19 is also not within the range
of normal business-cycle crises.
3
See, e.g., Matteo Cataldi and Antonietta Alfano, “The Impact of
COVID-19 on Transfer Pricing: Issues Arising During the Economic
Downturn and Possible Solutions,” 27(4) Int’l Transfer Pricing J. (Apr.
2020).
TAX NOTES INTERNATIONAL, JUNE 15, 2020
For more Tax Notes® International content, please visit www.taxnotes.com.
COMMENTARY & ANALYSIS
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
In a transfer pricing context, transacting
parties within the same group obviously did not
anticipate (for example, in their contractual
arrangements) the question of which parties
would bear a risk like COVID-19. Even third
parties did not anticipate this risk, which will
likely lead to a wave of disputes among them.
If the allocation of such a risk could not be
anticipated, the typical transfer pricing
framework should apply to establish appropriate
transfer pricing adjustments. An analysis of the
contribution of parties within the value chain to
determine how third parties would have
negotiated under similar circumstances can thus
be relevant.
it more difficult — that is, compared with other
strategic, financial, and operational risks — to
isolate which entity within the value chain has
control of the risks, as paragraph 1.60 of OECD’s
guidelines requires.
If it is clear that transacting parties could not
anticipate the risk, and could not truly control it,
the effects the situation had on each individual
retailer’s business must be investigated to
determine if and to what extent the loss suffered
by the retailer should be shifted with the principal
and, if yes, how. Importantly, the OECD does not
entirely exclude the possibility that a routine
entity may end up in a loss position. Paragraph
1.129 of the OECD guidelines states:
When an associated enterprise
consistently realizes losses while the MNE
group as a whole is profitable, the facts
could trigger some special scrutiny of
transfer pricing issues. Of course,
associated enterprises, like independent
enterprises, can sustain genuine losses,
whether due to heavy start-up costs,
unfavourable economic conditions,
inefficiencies, or other legitimate business
reasons.
There are different ways to evaluate a one-off
2020 adjustment to the usual transfer pricing
policy. One could fairly assume that the
determination should be grounded in the specific
financials of the MNE itself, as well as relevant
benchmarks, if at all possible.
Many published articles discuss alternative
techniques for identifying more reliable
1253
COMMENTARY & ANALYSIS
comparables to be used for testing the year 2020
results based on the assumption that the 2017 to
2019 data will not be suitable because they will
not reflect the impact of the crisis. The following
approaches, inter alia, have been proposed:
adjustment of historical comparables through
regression analysis, use of forecast comparables
(for example, leveraging public data of
representative Chinese- or Hong Kong-listed
retailers), reexamination of the existing set, and
moving from interquartile to a full range.4
However, we believe that testing the retailer’s
full-year results, even using a suitable benchmark,
may not necessarily offer the most reasonable
results in compliance with the arm’s-length
principle. Instead, the specific features of each of
the three distinct segments of the 2020 financials
— the pre-lockdown, lockdown, and post-
lockdown periods — should be analyzed in
isolation; the underlying facts are different, and
they may call for different solutions to reach the
heart of this exceptional situation.
Keeping in mind the profile of our
hypothetical retailer, the following key principles
and suppositions should serve as a framework for
this analysis:
• COVID-19 Is Not a Reason to Discard the
TNMM: The extraordinary crisis alone does
not justify a change in transfer pricing
methodology; any departure must be
independently justified by a change in the
functional and risk profile of the parties.
Also, a change in method is not needed to
handle loss sharing between principals and
retailers. The TNMM is not disqualified;
instead, it must be adapted to the
exceptional circumstances, and a one-off
adjustment to the transfer pricing policy
may be justified.
• Identification of Decision Takers (Centralized
Versus Decentralized Groups): MNEs have had
to make many decisions as they manage the
COVID-19 crisis, and they will have to make
more. A clear understanding of who within
the group made these decisions may tell a
lot about which parties are in control of the
4
See, e.g., Harlow Higinbotham, Vladimir Starkov, and Nihan Mert-
Beydilli, “Managing Transfer Pricing in the COVID-Related Economic
Downturn,” Tax Notes Int’l, Apr. 20, 2020, p. 347.
1254
For more Tax Notes® International content, please visit www.taxnotes.com.
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
decisions and thus should bear the related
consequences. For example, some MNEs
deliberately decided not to avail themselves
of particular public subsidies for
reputational reasons.
• Retailer Loss — Optical Effects: When it comes
to the loss shown in the retailer accounts,
one should carefully consider the extent to
which: (a) the loss is because of COVID-19
(if a drop in profits started before the
pandemic, including because of the use of a
transfer pricing methodology that wasn’t
fully consistent with the TNMM, one should
isolate those losses); and (b) the loss has
already been shifted to the principal, at least
in part. This may happen when a full price
return policy is in place. While such policy is
in principle consistent with the application
of TNMM, there may be situations where —
especially for the spring/summer season —
the returns exceed the historical average and
serve, per se, as an extraordinary support
from the principal for local retailers.
• Relationships With Unrelated Parties (Such As
Wholesalers): These relationships could be
relevant (but not decisive) when testing the
reasonability of the approach taken.
Examples of relevant matters include the
sustainability of losses left with the retailer,
special contributions by the principal, and
price changes during the year. That noted,
one should bear in mind that the original
choice of the TNMM already implicitly
disqualified the arrangements with these
unrelated parties from serving as reliable
internal comparables (otherwise the CUP
method would have been selected).
• Consistency: The final position of the retailer
must be consistent with the way it was
treated in the past and will be treated in the
future. Any reduced profitability (or loss)
should not be grounds to call for a higher
profit than was reported in past years when
group sales were strong, nor should it justify
a change in the functional profile in future
years (for example, treating a retailer as if it
became more entrepreneurial and should be
entitled to higher returns in excess of
applicable interquartile ranges).
While we present one method for
apportioning COVID-19 losses among parties — a
TAX NOTES INTERNATIONAL, JUNE 15, 2020

method that we believe has several merits — we
also acknowledge that other solutions could
achieve similar results.
A Proposal for Allocating COVID-19 Losses
A Case Study: Key Facts
Tables 1 and 2 show the difference between
the pre-pandemic budgeted sales, costs, and
profits of a retailer and the expected sales, costs,
and profits of the same distribution affiliate as
reforecast in early June, assuming the transfer
pricing policy between the principal company
(which supplies the goods) and the distributor is
unchanged. The gross margin is kept at 50 percent
in both.
We acknowledge that the case study is a
simplification and that financial data shown will
not represent the situation of all retailers. The
calculations are for illustration purposes only. We
also note that local distributors will have different
abilities to reduce costs in crisis times. For
instance, rents in the United States tend to be
more variable than rents in Europe. Another
example is labor market flexibility: Retailers
would have more flexibility to make staff
redundant in Asia than in France, Germany, Italy,
or the European Nordic countries.
The Proposal
We propose the following logical steps and an
approach that segments the financial result in
three sections (pre-lockdown, lockdown, and
post-lockdown).
Year 2020
Pre-Lockdown
For this period, TNMM is applied as usual
with any seasonality factored in by reference to
past years. In the simplified facts of our example,
no adjustment is needed because budget was hit.
Lockdown
The financial consequences of the lockdown
period are in principle isolated; their causes are
investigated; and they are treated accordingly:
• Any cost that stems from the principal’s
decisions should be borne by the principal.
Examples include a decision not to avail
itself of subsidies for reputational reasons or
TAX NOTES INTERNATIONAL, JUNE 15, 2020
For more Tax Notes® International content, please visit www.taxnotes.com.
COMMENTARY & ANALYSIS
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
a decision not to dismiss employees for
ethical rather than business reasons.
• To the extent any meaningful increase in the
principal’s e-commerce sales to customers in
the retailer’s region is clearly the result of
the closure of physical stores, it may
necessitate shifting a portion of the
operating margin earned by the principal to
the retailer.
• Temporary costs that the retailer incurs to
allow it to resume operations may remain
with the retailer because they pertain to
local day-to-day operations — that is, unless
the principal requires the retailer to take
extra steps, possibly as part of a global
strategy, in which case the principal may
pay the relevant costs. A different
conclusion may apply to permanent
measures, although that will be part of a
wider discussion on the ongoing
profitability of the retailer in the post-
pandemic climate.
• Except as specifically noted below, the rest
of the loss should remain with the retailer.
Post-Lockdown
Again, financial results for this period are
isolated and duly analyzed and benchmarked. In
principle, there may be two cases :
5
• The retailer may quickly return to pre-
pandemic levels of sales, ending up in a
profitable position before any transfer
pricing adjustment. In this case, the same
approach that was used pre-lockdown may
apply. If the level of profit is below the first
interquartile of the (unchanged) 2017-2019
set of comparables, there may be room to
not make an adjustment depending on the
reason for these results and provided that
this approach is supported by a revised set.
• The retailer makes a slow and gradual
recovery, ending the year in a loss position
(this is the result shown in our case study).
In this case, we believe the use of tailored
comparables — for example, targeting start-
up companies — may support the position
that the retailer’s targeted profit for the
5
We do not consider the disaster scenario when there are no signs of
meaningful recovery, which would require a case-by-case evaluation.
1255
 Table 1. Pre-Pandemic Budget

1256
Budget 2020 Retailer Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

Turnover 1,200 100 100 100 100 100 100 100 100 100 100 100 100

Cost of Goods Sold 50% 600 50 50 50 50 50 50 50 50 50 50 50 50

Gross Margin 50% 600 50 50 50 50 50 50 50 50 50 50 50 50

Selling and Labor Costs 28% 336 28 28 28 28 28 28 28 28 28 28 28 28

COMMENTARY & ANALYSIS

Rents 11% 132 11 11 11 11 11 11 11 11 11 11 11 11

Advertising 2% 24 2 2 2 2 2 2 2 2 2 2 2 2

G&A 5% 60 5 5 5 5 5 5 5 5 5 5 5 5

Operating Expenditures 46% 552 46 46 46 46 46 46 46 46 46 46 46 46

Operating Margin 4% 48 4 4 4 4 4 4 4 4 4 4 4 4

Operating Margin % 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%

Assumptions:
• Sales of 100 per month.
• No inventory, no seasonal effect.
• 100 percent of goods is purchased from the group (Principal).
• No currency risk.
• Target margin 4 percent - Median (TNMM).
• Benchmark Q1 2 percent - Q3 6 percent.

For more Tax Notes® International content, please visit www.taxnotes.com.

TAX NOTES INTERNATIONAL, JUNE 15, 2020
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
 Table 2. Post-Pandemic Reforecasts — No Change of Transfer Pricing Policy (No Change of Markdown)
Pre- 2020
COVID-19 Lockdown Period Post-Lockdown Period Reforecasts
P&L Retailer 2020 Budget
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
Turnover 1,200 100 100 0 0 0 50 60 70 70 70 80 80 100% 680
Cost of Goods Sold 50% 600 50 50 0 0 0 25 30 35 35 35 40 40 50% 340
Gross Margin 50% 600 50 50 0 0 0 25 30 35 35 35 40 40 50% 340
Selling and Labor Costs 28% 336 28 28 8.4 8.4 8.4 25.2 25.2 25.2 25.2 25.2 25.2 25.2 38% 258
Rents 11% 132 11 11 11 11 11 11 11 11 11 11 11 11 19% 132
Advertising 2% 24 2 2 1 1 1 2 2 2 2 2 2 2 3% 21
G&A 5% 60 5 5 4.8 4.8 4.8 5 5 5 5 5 5 5 9% 59

TAX NOTES INTERNATIONAL, JUNE 15, 2020

Operating Expenditures 46% 552 46 46 25.2 25.2 25.2 43.2 43.2 43.2 43.2 43.2 43.2 43.2 69% 470
Operating Margin 4% 48 4 4 -25.2 -25.2 -25.2 -18.2 -13.2 -8.2 -8.2 -8.2 -3.2 -3.2 -19% -130
Operating Margin % 4% 4% -36% -22% -12% -12% -12% -4% -4%
Profit = 8 Loss = (75) Loss = (62) Loss = (130)
Profit = 4% Loss = (13%) Loss = (19%)

Note: Summary figures in the table are rounded.

Assumptions:
Lockdown period: March through May 2020. Shops are closed by law during that period.
Key figures (as a percentage of budget):
• Sales: 0 percent.
• Selling expenses (labor costs subsidized by the government): 30 percent.
• Rents: 100 percent.

For more Tax Notes® International content, please visit www.taxnotes.com.

• Local advertising: 50 percent.
• General and administrative expenses: 95 percent.
Post-lockdown period: June through December 2020.
Key figures (as a percentage of budget):
• Sales (gross margin unchanged): from 50 percent to 80 percent.
• Selling expenses: 90 percent.
• Rents: 100 percent.
• Local advertising: 100 percent.
• General and administrative expenses: 100 percent.

1257
COMMENTARY & ANALYSIS

© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
COMMENTARY & ANALYSIS
Table 3. Decisions/Facts Matrix of the Case
COVID-19-Decisions
Closure
Not avail of subsidies
Labor costs (hiring, freeze, dismiss)
Shop layout and operations (reduced
hours, protection gear)/investments:
temporary measures
Shop layout/operations/investments:
ongoing
Rent (unilateral/negotiated reduction,
suspension of payments)
Local advertising (unchanged/reduced)
G&A reduction
Sellout price and discounts
Orders for autumn/winter
Full price returns versus restrictions in
the sale to outlets of unsold products
E-commerce sales
Other information
2019 results
2020 group results
a
The principal may govern this decision given wider reputational concerns.
b
Simplified assumption.
period should be set at break-even (or
slightly more) and a profit adjustment made
accordingly.
Sanity Checking
The final full-year 2020 result should be
checked to confirm the following:
• sustainability: any loss should be recoverable
over the following three to five years, and a
multiyear approach should be applied to
confirm an average profitability in line with
the comparables;
• reasonability: corroborative analysis may be
possible, for example, through full-year
forecast comparables or regression
analysis);
• consistency: both with prior and future years
(retailer to remain a routine entity); and
1258
For more Tax Notes® International content, please visit www.taxnotes.com.
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Principal Retailer
NA (decided by law) NA (decided by law)
NA in this casea
NAb X
Limited X
X Limited
X Limited
X Limited
X Limited
X
X Limited
X
Flat/no sizable increase Not involved
Profit Profit
Profit
• tax-related considerations: includes
potentially aggressive positions or those
based on explicit guidelines from local
authorities as well as customs duty
implications.
Year 2021 and Beyond
A wait-and-see approach is advisable for 2021
and beyond.
Proposed Post-Pandemic Adjusted Results
Applying the proposed solution to the
hypothetical case study leads to Table 4, which
shows adjusted results for the retailer. For the
sake of simplicity, we assume that the loss in the
lockdown period is left entirely with the retailer.
However, according to the foregoing discussion,
TAX NOTES INTERNATIONAL, JUNE 15, 2020

part of it could well be shifted to the principal
under specified circumstances.
The adjusted results show a margin of -67 on
a full-year basis, instead of -130 (the result based
on the reforecast).
The term “lost profits” refers to the profits lost
as a result of COVID-19 compared with the initial
budget margin. Compared with the budget
margin (established pre-pandemic), the total lost
profits kept at the distributor level under our
proposed method is -115 (that is, a -67 loss instead
of 48 profit).
Using the proposed method, the principal
company (supplier of the goods) absorbs/bears
-63 of the market losses. Thus, out of a total loss of
-130, -67 is left with the retailer. This corresponds
to 48 percent of the total loss under the reforecast
and 35 percent of the total lost profits under the
reforecast, which equal 178 (a reforecast loss of
-130 versus a budgeted profit of 48).
The loss left with the retailer appears
reasonable. In fact, assuming the sales get back to
pre-pandemic levels in 2021, and also assuming a
6
5 percent margin in 2021, 2022, and 2023, the
average operating margin in 2020-2023 would be
2.64 percent,7 which would likely fall within the
range of the expected set of comparables.
We believe the proposed solution has the
following benefits:
• It preserves the transfer pricing policy and
method while acknowledging the
extraordinary features of the hazard risk
being faced in 2020, which also calls for a
one-off adjustment of the policy (rather than
a “business as usual approach”
implemented through adjusted
benchmarks).
• It limits the otherwise huge shift of losses to
the principal, which could severely affect
the principal’s dividend distribution
capacity and the covenants agreed by it with
financing banks. Given its size, such a shift
would also likely trigger scrutiny by the tax
authorities.
6
The total operating margin is 180 for the three years (5 percent x
1,200 of sales x three years).
7
That is, the 2021-2023 operating margin less the 2020 loss (180 - 67 -
113) divided by 4.280 (the total sales 2020-2023).
TAX NOTES INTERNATIONAL, JUNE 15, 2020
For more Tax Notes® International content, please visit www.taxnotes.com.
COMMENTARY & ANALYSIS
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
• It factors in the centralized and
decentralized features of the decision-
making process and control over risk to the
extent doing so makes sense (some
occurrences are out of the parties’ control).
• It is mindful of the sustainability of the
retailer’s financial position and looks at
market practice as well as what independent
parties would have done.
Finally, it is worth highlighting that aside from
the analysis of the retailers’ economic results,
there are also financial considerations that must
be taken into account — funds must be provided
to retailers to finance their operations. To this end,
a choice must be made between equity
contributions and intercompany loans
considering local tax restrictions on interest
deductibility and the risks of recharacterization of
debts (as highlighted in the 2020 OECD
guidelines on financial transactions8 and in the
practice of several jurisdictions). While analyzing
this issue is beyond the scope of this article, we
want to highlight that (a) there are
interconnections between this issue and the
foregoing discussion on the transfer pricing of
goods, and (b) simply keeping intercompany
trade payables outstanding, although pragmatic,
may not be the safest long-term solution.
Conclusion
This article offers a conceptual path that some
MNEs may follow to deal with the extraordinary
situation of COVID-19 — a path that is consistent
with OECD guidelines and TNMM philosophy.
The proposal has the merits of being practical,
justifiable from an economic and arm’s-length
perspective, and allowing room for a degree of
sophistication in the analysis that factors
advanced standards on decision-making and risk
control, to the extent applicable. As always in
transfer pricing, it may be necessary to confirm
the outcome of the method by corroborating
analyses.
We fully acknowledge that we are at the
forefront of a new scenario — and possibly a new
8
OECD, “Transfer Pricing Guidance on Financial Transactions:
Inclusive Framework on BEPS: Actions 4, 8-10” (Feb. 11, 2020) (chapters
A-E will be incorporated as Chapter X of the OECD transfer pricing
guidelines).
1259
 Table 4. Adjusted Results

1260
Pre- 2020
P&L Retailer 2020 Budget COVID-19 Lockdown Period Post-Lockdown Period Adjusted

H2
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Adj

Turnover 1,200 100 100 0 0 0 50 60 70 70 70 80 80 100% 680

Cost of Goods Sold 50% 600 50 50 0 0 0 25 30 35 35 35 40 40 50% 340

COMMENTARY & ANALYSIS

Gross Margin 50% 600 50 50 0 0 0 25 30 35 35 35 40 40 50% 340

Selling and Labor Costs 28% 336 28 28 8.4 8.4 8.4 25.2 25.2 25.2 25.2 25.2 25.2 25.2 38% 258

Rents 11% 132 11 11 11 11 11 11 11 11 11 11 11 11 19% 132

Advertising 2% 24 2 2 1 1 1 2 2 2 2 2 2 2 3% 1

G&A 5% 60 5 5 4.8 4.8 4.8 5 5 5 5 5 5 5 9% 59

Operating Expenditures 46% 552 46 46 25.2 25.2 25.2 43.2 43.2 43.2 43.2 43.2 43.2 43.2 69% 470

Operating Margin 4% 48 4 4 -25.2 -25.2 -25.2 -18.2 -13.2 -8.2 -8.2 -8.2 -3.2 -3.2 -62.4 -19% -130

Transfer Pricing 62.4 9% 62

Adjustment*

Final Operating Margin 4 4 -25.2 -25.2 -25.2 -18.2 -13.2 -8.2 -8.2 -8.2 -3.2 -3.2 0 -10% -67

Operating Margin % 4% 4% -36% -22% -12% -12% -12% -4% -4% 0%

Profit = 48 Profit = 8 Loss = (75) Profit = 0 Loss = (67)

Profit = 4% Profit = 4% Profit = 0% Loss = (10%)

Note: Summary figures in the table are rounded.

*The transfer pricing adjustment can be made in various ways leading to the targeted profit.

For more Tax Notes® International content, please visit www.taxnotes.com.

TAX NOTES INTERNATIONAL, JUNE 15, 2020
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

normal — that poses new challenges and
questions in the transfer pricing area. We hope
this article is a useful contribution and that the
OECD will hopefully build on this proposal to
provide timely guidelines to the operators, thus
relieving companies from the pain of the technical
uncertainty.
TAX NOTES INTERNATIONAL, JUNE 15, 2020
For more Tax Notes® International content, please visit www.taxnotes.com.
COMMENTARY & ANALYSIS
© 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Celerity and pragmatism in the release of
guidelines at all levels, general consensus among
most advanced jurisdictions, reasonability in
future audits phase, and the proper functioning of
mutual agreement procedures are more essential
than ever to get through this period — and even
turn it into an opportunity to build an enhanced
transfer pricing world. 
1261