Czech Republic: Recommendations of the OECD for Transfer Pricing in relation to the impacts of the Covid-19 pandemic


published on 1 February 2021 | reading time approx. 2 minutes


Specific economic conditions brought about by the Covid-19 pandemic and consequent government responses have given rise to numerous practical difficulties in applying the arm’s length principle (not only) in 2020 and this has led both taxpayers and tax authorities to consider the difficulties in practical application, specifically in terms of how to correctly set transfer pricing methodology. For this reason, the Organisation for Economic Co-operation and Development (the “OECD”) issued a report containing recommendations for taxpayers and financial administrations on how to proceed when applying transfer pricing rules in periods sadly affected by the Covid-19 pandemic.


The report by the OECD follows from the basic premise of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “Guidelines”) and focuses on interpreting those principles already contained in the Guidelines in connection with the extraordinary circumstances arising from the Covid-19 pandemic.

The OECD issued the report on 18 December 2020. It is the result of the consensus reached by the financial administrations of 137 OECD/G20 countries involved in the BEPS initiative, the Czech financial administration included.

The recommendations focus on four priority topics, specifically: (i) comparability analysis, (ii) losses and allocations of specific costs resulting from the Covid-19 pandemic, (iii) the impact of government assistance programmes and (iv) the impact on Advance Pricing Agreements (the “APA”).

The topics are closely linked and the recommendations quite clearly underline a preference for individual solutions to individual cases assessing their specific circumstances. The OECD says no to a simplified view of determining the functional profile of a company (a routine or limited entity, for example) and the therefrom ensuing clear conclusions on bearing risks and incurred loss or even extra costs.

Another feature that runs through the entire report is an analogy with the conduct of independent entities under comparable circumstances, i.e. the creation of a hypothesis on how companies would act under the given circumstances in an arm’s-length transaction.

In what regards comparability analysis, there is practically no commonly used historical data that may be deemed comparable to the financial data for 2020, when the Covid-19 pandemic hit. For this reason, the recommendations indicate what alternative data can be used for comparability analysis. These include, for example, changes in costs or revenues at the time of the pandemic, the impact of governmental responses, changes in macroeconomic indicators in given sectors, and deviations of actual financial indicators from those planned. 

The report also draws attention to the possibility of taking into account the effects of the pandemic on transfer pricing adjustments in tax returns, should the data necessary for such adjustments be available after the accounts have been closed and provided such a procedure be in accordance with local rules and regulations.

In furtherance to comparability analysis, the report does not allow for any analogy between the current economic crisis and that of 2008/2009 because of the different circumstances in each case.
Following the OECD Guidelines, loss-making companies may be used in the context of the comparability analysis, but only under the condition that those loss-making companies bear risks comparable to those of the tested company and that they meet all the search criteria applied in the benchmarking analysis.

As has already been stated above, each case has to be judged on its own merits. When allocating losses or extraordinary costs among the individual group members in view of the Covid-19 pandemic, it is necessary to consider the distribution of risks and, most importantly, the decision-making powers to manage such risks. Limited companies may, at first glance, bear certain risks and associated costs, provided they are related to the decision-making powers of local management.

Therefore, the distribution of losses within multinational enterprise groups must always be based on a functional and risk analysis of the companies concerned and there must be sufficient evidence at hand to uphold them before the tax authorities. This should be kept in mind especially now when accounts are being closed for the year 2020 after a Covid-19 stricken year for many a company and when transfer pricing adjustments are being set up.

In conclusion please note that you really need to discuss and describe in perfect detail all the factors that in view of the COVID-19 pandemic have impacted transfer pricing in 2020 (and the upcoming years) in your transfer pricing documentation. Only in this way can you prevent the tax authorities from questioning it.

Our transfer pricing team experts are at your service; they can help you assess the impact the Covid-19 pandemic has had on your transfer pricing and they can help you put together your transfer pricing documentation.

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