The impact of COVID-19 on your Transfer Pricing arrangements

HLB Thailand Tax Team


The COVID-19 pandemic has had an abrupt impact on the world’s economy. Well over a year of economic development has been turned on its head as countries continue to  lockdown in a bid to contain the spread of the virus. 

The resulting economic fallout has had far-reaching effects on multinational groups (“MNEs”). Many are starting to question how they’ll address low or negative profitability, or changes in Transfer Pricing (“TP”) policies.

While TP may not be the first consideration for MNEs in responding to the pandemic, its importance will become clearer as groups start to restructure their business activities in response to the crisis.

Here are the critical TP areas that need to be dealt with during these unprecedented times.

Transfer Pricing Documentation (“TPD”) 

The Transfer Pricing Documentation (“TPD”) requirements are contemporaneous, meaning a taxpayer must use the latest available information and data to establish its Transfer Pricing.     

In Thailand, TP law is evolving, and currently lacks the proper guidance for tackling certain issues. For example, if a company with substantial related party transactions should begin reporting low or no profitability due to the economic impact caused by COVID-19, there are no local guidelines for the company to consider in preparing its TPD. 

It is therefore essential to focus on the guiding principles provided by the Organization for Economic Cooperation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD TP Guidelines”), which are mainly followed by the Thai Revenue Department and many other countries.  

In this case, MNEs may want to consider the following:

a. Increased focus on industry analysis  

Industry analysis requires the assessment of competition and supply and demand trends in the industry. It also assesses the competitiveness of the industry against other developed or emerging markets, and captures the use of intellectual property and technological developments in the industry. 

Furthermore, it highlights how credit works in the industry, and the exact impact of external factors. MNEs should intensify their efforts in constructing a detailed industry analysis of the impact COVID-19 has had on the industry, vis-a-vis, the facts and circumstances of taxpayers’ business.

b. Functional, assets and risk (“FAR”) analysis  

The FAR analysis should focus on functional and operational disruptions to support current business operations and subsequently the economic analysis.

c. Economic analysis  

Given the current circumstances, economic analysis is of significant importance. 

Below are a few critical points that should be incorporated into the TPD:

  • When it comes to selecting comparable businesses for benchmarking purposes, reassess the quantitative and qualitative filters used. For example, consider accepting loss-making companies (previously rejected on account of reported losses but are functionally comparable) and rejecting companies that are not affected by the current situation.
  • Consider using single-year benchmarking results only for comparison purposes. Adopting multiple-year benchmarking results – which is the normal approach – may not yield a proper reflection of the prevailing economic circumstances.
  • Accounting and capital adjustments – to enhance comparability, MNEs could consider adjustments for items such as fixed costs, foreign exchange fluctuations, working capital, unutilised capacity, inventory, risk, accounts payable and receivable, and exceptional items. 
  • Loss/special factor analysis – associated enterprises, just like independent enterprises, can sustain genuine losses, due to unfavourable economic conditions. Moreover, it becomes of utmost importance that such an analysis should be prepared to explain the economic and commercial impact of COVID-19 on the business.

Financing policies and cash flow management

Extraordinary times call for exceptional decision making in order to sustain or secure adequate cash flow. MNEs should consider the impact of its financing policies and cash flow management during this period, including:

  1. Reassess intra-group financing policies – in the short term, businesses within a group could consider accessing funds from the open market, where beneficial, rather than sources within the group.

Additionally, parent entities could provide support to group companies by extending explicit guarantees to access funds from third parties to address the short-term cash crunch (by providing subsidies or by not charging guarantee fees for such periods).

Existing intra-group funding arrangements could also be realigned or restructured. For example, by: 

  • Reducing interest rates on existing loans. 
  • Extending interest/principal payment terms, to assist group companies manage their cash flows.
  • Creating a framework for cash pool arrangements (if not followed presently), where group companies having excess funds could contribute for the benefit of other group entities in managing their working capital requirements (reducing time to assess funding options, lowering the cost of funding and minimising paperwork).
  1. To reduce the burden on the subsidiaries immediately, MNEs could also look to restructure or subsidise the following intercompany arrangements:
  • Management and/or technical assistance fees – absorb as a parent of the Group.
  • Subsidising the license or the royalty payments.
  • Volume discount or reduction in the actual product price to subsidiaries (especially in the case of low-risk distributors) 

Alternatively, the arrangements could be reviewed in order to increase intercompany charges in order to manage the group’s cash flows, while still remaining compliant with the Arm’s Length Principle.

Emergency management planning (supply chain) 

The COVID-19 pandemic has highlighted to MNEs the importance of business continuity plans to ensure smooth governance and operational effectiveness. 

By having a fallback model, a group, to some extent, would be able to manage short-term supply chain disruptions. It would also enable the group to rearrange an alternative subsidiary or a third-party supplier in case a specific company could not meet the demand. 

MNEs may need to consider the impact on their TP arrangements by switching to an alternative supplier or adopting other measures that weren’t previously anticipated.

Impact on overall operating model/business restructuring 

Changes to business operations in response to the COVID-19 pandemic may lead to a short term or temporary reallocation of functions between the various entities of a group. These may impact their current characterisation, and therefore the overall TP analysis for the group. 

If restructuring and reformulating TP policies is required, they should be documented from an economic and commercial standpoint (in the TPD), along with the corresponding tax consequences. 

An analysis of ‘options realistically available’ for MNEs to appropriately assess the impact of supply chain modifications to group entities, from a short and long term perspective, will be valuable in this context.

Impact on Master File (“MF”) and Country by Country (“CbC”) report 

The master file is a statement relating to the MNE’s global operations and activities, and the pricing policies relevant to Transfer Pricing within the MNE group.

Still confused about the Master File? Read: What’s the difference between a Master file and a Local file?

Country-by-Country (CbC) reports contain valuable information on the global allocation of the income, taxes paid, and the location of economic activity among tax jurisdictions in which an MNE group operates.

These reports are used by tax authorities to make high-level risk assessments of an MNE group to conduct informed TP audits. MNEs should focus on documenting explanations of changes that arise in their reporting compared to prior years.

Advance Pricing Agreements (“APA”) 

APAs made with tax authorities are an effective risk management tool to minimise disputes about the TP arrangements adopted. The arm’s length price/range proposed by the taxpayer uses past transactions to forecast future business profits and making so-called ‘critical assumptions’.

These critical assumptions generally don’t consider a change in economic conditions or the FAR of the counterparty involved in the transactions, or fundamental changes in the conditions of a particular industry. 

Taxpayers that have agreed an APA with the Thai Revenue Department should review the critical assumptions and assess whether the COVID-19 pandemic might trigger the need for consultation with the tax authorities, to renegotiate the agreed approach, or to revise or cancel the APA. 

Taxpayers who wish to apply for an APA in the current environment or are in the process of agreeing an APA, should carefully consider the critical assumptions and the period of the arrangements (normally an APA is made for 3-5 years).

COVID-19 and Transfer Pricing arrangements in Thailand

Thailand is a manufacturing and distribution hub for many MNEs. Usually, their subsidiaries operate in Thailand as low risk or routine businesses, meaning they perform routine functions and assume routine risks as compared to the entire value chain. 

The Thai Revenue Department would, therefore, expect a reasonable return on a year-on-year basis for such companies. If they report low or no profitability, such companies are likely to be challenged by the Thai Revenue Department. 

As such, these companies should document the reasons for the decline in their profitability in their TPD, showing whether such low or no profitability is caused by lower capacity utilisation, lower market demand, exceptional fixed costs, or other factors. 

The tax authorities may also question the financial position of the principal, in case the principal is not significantly impacted due to the COVID-19 outbreak. If not, the Thai Revenue Department may still demand a reasonable return for the Thai companies, as the principal enjoys the entire profits from the transaction. 

This is possible by making year-end TP adjustments. 

To find out more read our insights on year-end adjustments.

The burden of proof 

The sudden changes to the business environment in 2020 have presented serious challenges for businesses and governments alike as they adapt to new and uncertain economic conditions. 

It will be vital for MNEs to take a holistic approach as they start to address their TP policies, especially to assist in substantiating losses, the low profitability they may be reporting in the future, or the re-pricing/re-arranging of related party transactions/arrangements.

The burden will be on MNE groups to properly document the impact of COVID-19 on their related party transactions. The preparation and maintenance of Transfer Pricing documentation and related documents (invoices, agreements, emails, etc.) will facilitate reviews by the tax authorities and therefore help resolve any Transfer Pricing issues that may arise. 

Although the reporting of lower financial results overall should be expected, MNE groups can expect tax authorities to closely examine changes in financial results reported by group entities with related party transactions. 

Without properly prepared Transfer Pricing documentation to show that the transfer prices are at arm’s length, taxpayers are at risk of Transfer Pricing enforcement actions by tax authorities and double taxation arising from those actions.

If you want to learn more about Transfer Pricing, check out our article on Everything you’ve ever wanted to know about Transfer Pricing in Thailand (with examples).


HLB’s Transfer Pricing specialists are here to help. 

Thailand’s transfer pricing rules are complex, and can differ greatly from those in neighbouring countries. To stay compliant, book a meeting with Rohit Sharma and his team of local transfer pricing experts at HLB Thailand today. 

Rohit Sharma

Principal, Transfer Pricing


Which Southeast Asian Nations Have Adopted the OECD BEPS Action Plan 13?

HLB Thailand Transfer Pricing Team


The OECD first created the Base Erosion and Profit-Shifting (BEPS) action plan in 2016. Guidelines were initially adopted by 82 countries. Today, over 140 countries operate in line with the BEPS action plan. 

Many countries within the ASEAN Economic Community (AEC) have since introduced their  Country-by-Country report framework, as set out by the OECD. These include Country-by-Country Multilateral Competent Authority Agreements for the automatic exchange of information. 

Here’s our breakdown of Transfer Pricing in Southeast Asia.

Read more: Everything you’ve ever wanted to know about Transfer Pricing in Thailand (with examples)

Transfer Pricing guidelines in Southeast Asia


Vietnam’s economy is booming. Cheap labour costs are seeing the country become a popular manufacturing destination in Asia. To make sure all of this new business stays in check, the Ministry of Finance introduced its Transfer Pricing guidelines in 2017.

Transfer Pricing documentation should be maintained by Vietnamese companies with controlled transactions, to prove that pieces are at arm’s length. 

But bear in mind, if your revenue is below VND 50bn (approx. USD 2.2m) and transactions with associated enterprises are below VND 30bn (approx. USD 1.3m), you don’t need to worry about preparing Transfer Pricing documentation in Vietnam.


In recent years the Philippines has become an outsourcing hotspot, in part due to its substantial population of fluent English speakers. Naturally, the boom in multinational operations has raised widespread concerns about Transfer Pricing. 

The chance of an annual tax audit in the Philippines is high, and there are no set penalties for Transfer Pricing issues. General tax penalties under the NIRC and other relevant laws will therefore apply. Because these fines will be based on percentages, they can be quite high. 

Transfer Pricing documentation in the Philippines has become a requirement, and you’ll have to substantiate exactly how you’ve calculated the prices you charge for controlled transactions and calculate these prices as they happen, not at the end of the year

You can find out more about the Philippines’ Transfer Pricing regulations here.


Malaysia joined many of its other Southeast Asian neighbours by implementing its Transfer Pricing guidelines in 2017. These are well-defined and extensive, following the OECD’s three-tiered approach. This requires the preparation of a local and master file, as well as country-by-country reporting along with the general Transfer Pricing documentation.


To combat perceived Transfer Pricing abuses and loss of tax revenue in Cambodia’s state budget, the Cambodian Ministry of Economy and Finance issued the Prakas 986 in  2017.

The Prakas 986 is based on the OECD’s Transfer Pricing Guidelines and requires the steps and results of the benchmarking process to be documented in an OECD-compliant TP document, preferably conforming to the guidance of the OECD’s BEPS Action 13 report of Country-by-Country reporting.


The Ministry of Finance in Indonesia unveiled regulation PMK 213 in December 2016, demanding a tighter deadline for compliance, and follows the guidance of the OECD’s BEPS Action 13.

Transfer Pricing documentation used to only be a requirement for a taxpayer’s operations in Indonesia. PMK-213 changed this. Now, taxpayers are required to follow the three-tiered structure, meaning a Master File, Local File and Country-by-Country Report will all be necessary. 


Singapore is an attractive option for businesses in Asia. To ensure this business is above board, the Ministry of Finance announced it will join the framework for the global implementation of the BEPS. This includes the requirement of Master File and Local File, as well as Country-by-Country reporting.

While taxpayers in Singapore aren’t required to submit Transfer Pricing documentation when filing tax returns, you’ll still need to provide everything within 30 days of receiving a request from the IRAS, so it’s best to keep everything on file.


Thailand may have a reputation for being a bit slow off the mark when it comes to enforcing Transfer Pricing rules, but tighter regulation has finally arrived. There’s now a distinct need to get your Transfer Pricing documentation in order. 

For the most part, Thailand’s Transfer Pricing regulations follow the OECD’s guidelines, with some distinct local details. 

For example, Thailand’s new Transfer Pricing laws allow for 60 days to produce Transfer Pricing documentation once requested. If 60 days is too tight, you can request a further 60-day extension, and if it’s the first time the revenue department has requested Transfer Pricing documents from your company, a third 60 day extension is also possible. That gives first-timers a charitable 180 days to get their paperwork in order.  

That said, Thailand’s tax authorities require local benchmarking for establishing whether your Transfer Pricing rates uphold the Arm’s Length Principle. That means you’ll need to keep a close eye on local market rates. 

Additionally, the Thai tax authority’s statute of limitations extends for a full 5 years, requiring businesses to maintain extensive long term transaction records to avoid penalties and fees.    

Read moreThe impact of COVID-19 on your Transfer Pricing arrangements


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Planning Transfer Pricing Policies – Topic Cluster


Why wait until the Thai Revenue Department is knocking on your door to call for help? The more exposed your company is, the greater the risk of being hit by a tax bill and possibly even fines for noncompliance, so what can you do in advance to prevent this?

The answer, simply put, is planning, preparation and policy implementation. 

Before you enter into a controlled transaction or any transaction within your company’s parent group, assess the situation and plan your steps carefully. It’s worth taking some time to analyse what challenges you’re likely to face, how you’ll be able to overcome them and as a result be able to determine when it’s time to call the experts.

Read more: The impact of COVID-19 on your Transfer Pricing arrangements

Let’s face it, plenty of global companies face a range of issues when it comes to getting comprehensive and consistent policies in place – transfer pricing demands a level of transparency that requires copious amounts of data from a range of sources. Typically, in large multinationals, these sources are somewhat disparate and disconnected; all too often companies operating in multiple jurisdictions fail to synchronise their Electronic Resource Planning (ERP) systems, which in turn fragments data throughout the group of companies and often making it difficult to synthesise. 

Now, remember, the clock is ticking from the moment the Thai Revenue Department’s request for your transfer pricing documentation arrives and gathering, validating and harmonising all the data necessary is a lengthy process – one that can prove both time and resource-intensive, particularly if there are any surprises to be found, there is less time to mount a strategic defence. 

You may not be able to tweak systemic issues your company faces, there is no quick fix for issues like decentralised ERP systems, but at least being aware of such obstacles, you can begin compiling the necessary information from all the relevant parties before entering into an intra-company transaction. This is just one aspect where planning can save you time, money and needless stress in an already complex process.

Another means through which you can be proactive to strengthen your case – or at least your ability to respond to a transfer pricing request from the authorities – is tracking. Take into account just how smooth and streamlined your information flows are throughout the company group; budgets, forecasts and targets are difficult to track if this data is not managed effectively and proactively.

This could result in significant adjustments needed at the end of each tax year, which has the potential to convolute your transfer pricing procedures – another good reason to ensure that you have access to all of the information you need before entering into any transaction that may fall under Thailand’s transfer pricing legislation. 

To ensure your monitoring, reporting, forecasting and planning are up to date, be sure to enact company-wide policies that include monthly, quarterly and annual management of all data relevant to intra-company transactions. For this to work, it requires an adequate level of uniformity throughout the group – various software packages can bolster capacity in this area.

Any multinational dealing with big data for tax purposes both including and beyond transfer pricing will recognise the value of flexible reporting that keeps pace with the dynamism of a group that operates across multiple jurisdictions. 

Read more: Everything you’ve ever wanted to know about Transfer Pricing in Thailand (with examples)

There are technological means through which the entire group can collate their transaction data, apply cost allocation rules and adjust data throughout the year – while plenty of options exist, look for packages that guarantee transparent, traceable data that is completely visible. This may feel like an investment, but given the potential of fines for noncompliance with Thailand’s transfer pricing rules, few costs will exceed the amount needed to satiate the Thai Revenue Department. 

Always keep the golden rule in mind; assess before you initiate. Even if all systemic issues have been addressed and your group enjoys a free flow of validated information that is updated regularly, there’s no need to subject yourself to needless exposure by entering into a controlled transaction without doing a dry-run. 

This is where a planning report comes in. While this may feel somewhat like paying for the same thing twice, there are inherent benefits to compiling a planning report and few people will do it better than the professionals. View it as an investment that will pale in comparison to the additional taxes and penalties you could be hit with if the Thai Revenue Department even suspects you might be attempting to shift your profits to low tax jurisdiction.  

A planning report is effectively just a case of putting together the transfer pricing documentation you would need to, but doing it before the transaction takes place. This may take time and slow your transaction down, but – and this cannot be stressed enough – the cost of non-compliance is far worse than paying people who can all but guarantee your company’s dealings are above board.

Much in the way that practice makes perfect, a planning report gives you a chance to see where you might encounter difficulties and allows you to identify these issues without the time constraints and pressure of the Thai Revenue Department, so again – it all comes down to preparation.

Preparing for the worst is a good way to avoid it, but dedicating in-house resources to this process before even entering into a transaction may – for companies of a certain size – be counter-intuitive and that’s why HLB is here to absorb those time-consuming activities and do the legwork for you. 

With a range of tailored plans that are made to fit the specific needs of your business, as well as a host of expertise across a range of industries, HLB offers your company the best chance at making it through transfer pricing unscathed.

Get in touch

Whatever your question our team will point you in the right direction

Start the conversation
Get in touch

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