Transfer pricing implications of responses to the Covid-19 crisis could carry substantial risk to how international companies do business and avoid regulatory-driven financial risk. As these unprecedented economic and social conditions continue, companies are likely facing significant changes in customer demand as well as further disruptions to their supply chains.
Even as economies start reopening, the different timing and extent of reopening could necessitate a temporary rearrangement of supply lines. Companies will also likely reassess functions performed by their related entities in other taxing jurisdictions to mitigate the impact of the crisis.
Businesses should keep the following issues—which could have an impact on their future transfer pricing analysis—in mind.
- A related entity may have a change in functions it performs as companies adjust their supply chains.
- A related entity may be forced to delay or alter interest payments on intercompany loans.
- Companies will likely need to move cash, or provide technical, logistical or other support across geographies to help hard-hit affiliates.
- Local government decisions will also continue to have an impact.
Many such changes will create the need for companies to reassess their existing transfer pricing approaches. Therefore, each company will need to carefully consider how the Covid-19 crisis has altered the economics of its specific business.
We recommend businesses continue to keep transfer pricing considerations in mind as important decisions are made to alter business models during the ongoing Covid-19 crisis.
CSH is hosting an in-depth webinar on transfer pricing considerations during the pandemic on June 25; learn more and register here.
Foreign Currency Exchange Concerns
Business owners should keep an eye on currency exchange rates. While traditional reserve currencies such as the euro and the yen have remained relatively stable compared to the US dollar (USD), currencies in developing markets have not fared as well, experiencing sharp declines versus the dollar. For example, as of early mid-June, the Mexican peso and Brazilian real were down over 17% and 32%, respectively, compared to 12 months ago. These sharp moves can create opportunities for importers but create significant risks for US-based companies with subsidiaries or branches conducting business in local currencies. The risks include reductions in the value of earnings from the foreign operations when translated into USD, cashflow challenges associated with settling intercompany transactions denominated in USD and the potential of impairment in the value of a company’s investment in these foreign markets. In addition, the impact from the diminished buying power of customers based on these markets can have a negative impact on the demand for exporters. Business owners should understand their exposure to currency risk and develop strategies, including implementing hedging activities, to reduce the impact on their businesses.
Working Capital and Liquidity Modeling
Every business should have effective tools for monitoring working capital and projecting liquidity needs. This is especially important for businesses operating internationally that may encounter differing banking regulations, restrictions on capital investment and/or limitations on the ability to move cash back to the US. Models should be flexible and able to simulate multiple scenarios such as the slowdown of collections or the loss of a significant customer. This information becomes critical with the uncertainty introduced by Covid-19 and allows businesses to react by seeking out additional working capital or making other adjustments to the business.
Covid-19: Governmental Response
Many of the programs enacted in the US to support businesses affected by Covid-19, such as the Paycheck Protection Program, limit benefits based on a company’s domestic operations, potentially leaving overseas operations in jeopardy. As Covid-19 is truly a global pandemic, most major governments have imposed funding and relief packages to aid businesses affected. At CSH, our relationship with AGN International provides clients access to resources in 85 different countries that can help identify opportunities for relief programs intended to mitigate the financial impact of the pandemic.
For years, businesses have focused on optimizing the efficiency of their supply chains by seeking out low-cost suppliers and implementing just-in-time strategies. While those strategies may be cost efficient, they’ve been shown to be fragile and susceptible in the wake of Covid-19. In response to these risks, businesses should map out their existing supply chain and perform an analysis to determine where operations could be vulnerable to a disruption. Many businesses have already begun evaluating the trade-offs from reshoring significant portions of their supply chain. Be on the lookout for additional content related to supply chain issues.
Looking for additional Covid-19 guidance? Visit our Coronavirus Resource Center