In a pandemic environment, longstanding transfer pricing policies can lead to suboptimal tax results. Multinationals that incur losses in some locations while earning generous profits in others could be overpaying taxes. For many companies, modifications to intercompany pricing that reduce taxes payable and utilize losses are overlooked tax savings opportunities.
A multinational company's transfer prices of goods, royalties, services and loans affect where profits are generated, or the losses incurred in each country. For companies impacted by COVID-19, an assessment of estimated taxes payable and losses by country can highlight tax savings opportunities.
Ryan Donovan is president and CEO of the Council of Federal Home Loan Banks.
James Jack is the Executive Director and Head of the Business Owners Client Segment at UBS.
Aaron Lindstrom is the Regional Head of Transformation and Digital Partnerships for Allianz Trade in Americas, the world's largest and oldest provider of trade credit insurance. In his current role, Lindstrom is responsible for the execution of Allianz Trades' ambitious strategy to fundamentally transform the company for success in the digital era. He also drives the Region's digital partnerships by actively facilitating current and new partnership opportunities, and evolving current product offerings to serve market needs. In addition to the day-to-day responsibilities of his role, Lindstrom serves as a founding member for Allianz Trade's American Diversity & Inclusion Committee.
Lindstrom has 10 years of experience in the insurance industry. He joined Allianz Trade in 2012, serving as Sales Agent, then later Senior Sales Agent. Prior to joining the organization, he held positions with Enterprise Fleet Management and Enterprise Rent-A-Car.
Lindstrom has vast experience speaking at both regional and national events for organizations such as, The Risk Management Association, The National Association of Credit Managers, Washington Business Week, and The Associated Builders and Contractors. He is active in several regional trade organizations and frequently networks with startups and fintechs to stay up-to-date on the innovation of the trade credit insurance industry.
In his spare time, Lindstrom enjoys volunteering with organizations like Washington Trails Association and North Helpline. In the past, he has served on the boards of numerous non-profit organizations. When not hard at work for Allianz Trade or volunteering, Lindstrom enjoys traveling, camping, hiking and snow skiing.
For many cross-border businesses, well-established policies have facilitated the pricing of intercompany goods, royalties, and services transactions over many years. However, even the most robust transfer pricing policies were not designed for pandemic-driven closures. As a result, multinational companies have a high global effective tax rate even when incurring company-wide losses. Paying unnecessary income tax bills is particularly painful for those companies already short on cash.
Tangible tax savings
An example may best illustrate the potential for savings from revisiting transfer pricing policies in the wake of the pandemic. In this situation, a wholly owned manufacturer relies on a sizeable cost-plus margin policy when selling inventory to the parent company.
For a subsidiary in a 30 percent tax rate jurisdiction, a $2 million reduction in transfer prices leads to $600,000 in tax savings by utilizing tax-inefficient parent company losses. Corrections to royalty rates and service fees have similar impacts. The result is the same: utilizing tax net operating losses in Country A while reducing Country B’s taxes. That being said, there does need to be economic substance to justify these changes.
Implementing tax savings
Utilizing tax NOLs in Country A while paying fewer income taxes in Country B is, at first glance, a straightforward concept. However, implementing corrections to transfer pricing often requires some planning. In my experience, senior management on both sides of the border needs to be involved in the decision-making process. Other issues, such as adjustments to Customs entries, are additional complications. Transfer pricing documentation is often well-advised support for changes to transfer prices.
Tax auditors may have questions about why transfer prices have changed. COVID-19 has transformed the global business environment, but preparing support to quantify the pandemic's impact on a company is advisable. Furthermore, making modifications before year-end is less complicated than afterward.
Now more than ever, multinational companies should consider modifications to transfer prices when assessing their global effective tax rate; however, changes to cross-border taxes need to be explained. While there are some complications, cash and tax savings can be well worth the effort.
