By Emmanouela Kolovetsiou-Baliafa, Associate, KG Law Firm, Greece
In response to the COVID-19 crisis, the Greek Independent Authority for Public Revenues (IAPR) issued the Circular E. 2054/10.03.2021, providing guidance on the transfer pricing implications of the COVID-19 pandemic. The guidance follows the OECD’s “guidance on the transfer pricing implications of the COVID-19 pandemic,” issued on 18 December 2020.
The guidance addresses four priority issues that are also analyzed in the OECD guidance, including comparability analysis, losses and the allocation of COVID-19 specific costs, government assistance programs, and advance pricing agreements (APAs).
The guidance is an effort to strengthen local transfer pricing practice taking into account the negative economic effects of the Covid-19 pandemic.
Comparability analysis
The Greek guidance outlines the sources of information that may be relevant to the financial impact of the pandemic on controlled transactions for purposes of comparability analysis of controlled transactions for the year 2020. Such changes include changes in sales volumes and the comparison of budgeted/forecasted and actual data on sales.
The new guidance notes that a comparability analysis based on information from a prior financial crisis (e.g., 2008–2009) is not recommended since the Covid-19 pandemic’s effect on the economic environment is unique. Moreover, it states that loss-making comparables that satisfy other comparability criteria may be appropriate. The new Greek transfer pricing guidance also notes that any comparability adjustments should be quantified and adequately justified for appropriateness and necessity.
Losses and the allocation of COVID-19 specific costs
The circular reiterates the OECD’s position that a “limited risk” entity could incur losses due to the pandemic and still be in line with the arm’s length principle to the extent that such losses can be linked to risks that could be undertaken in the context of its functions.
The guidance also addresses the application of force majeure clauses to suspend, postpone or release from intra-group contractual obligations and clauses providing the option to revoke or revise the intercompany agreements. In response to the COVID-19 pandemic, independent parties could seek to renegotiate certain terms in their existing agreements, the guidance notes.
For exceptional costs incurred due to the pandemic, the circular follows the rationale of the OECD guidance as to the conditions that must be met and the circumstances that must be considered for the costs to be considered exceptional and allocated to the cost basis of each related entity involved. Moreover, exceptional costs should generally be excluded from the net profit ratio unless they are directly related to the controlled transaction as exactly described.
Government assistance programmes
Due to their extraordinary and temporary nature, government assistance programs linked to the pandemic are distinct compared to other types of subsidies of a more permanent nature. Therefore, they should be part of the transfer pricing documentation and should be analyzed both in the context of the functional and of the comparability analyses for the identification of comparable companies (e.g., to determine the geographical criterion, perform comparability adjustments, and address any differences in the accounting treatment of government assistance by the tested party, as well as the comparable companies).
Advance pricing agreements
Finally, the Greek tax authority follows the rationale of the OECD guidance, encouraging taxpayers and tax authorities to take constructive and collaborative approaches to the APA process.
The guidance clarifies that the pandemic’s economic impact is not a factor that should lead to the revocation of an APA. In addition, taxpayers should take all necessary actions to substantiate the need for a revision of APA applications – or some terms — already submitted that are under negotiation. Taxpayers also should consider submitting separate applications for the pandemic period and the subsequent period to cover the entire period, adding a clause permitting annual amendments to the arrangement.
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