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Law360 Quotes Elizabeth Stevens on COVID-19 Aid and Transfer Pricing

October 22, 2020, Law360 Tax Authority

Multinational companies receiving government funds to help them weather the coronavirus pandemic face some unsettled questions about their transfer pricing — including how amounts that are supposed to remain in the country providing the aid should be treated.

. . .

Elizabeth Stevens, a member of Caplin & Drysdale, gave the example of a Canadian company that in normal times would pay $100 to its U.S. affiliate, but whose operations have been hurt by the pandemic. Without government aid, the Canadian company could afford to pay only $50, but it receives $50 in support.

"Should it only pay $50 notwithstanding that that's not an arm's-length amount?" Stevens asked. Doing so, she said, could run counter to the U.S. transfer pricing rules on blocked income.

. . .

The U.S. regulations are "extremely strict" about when foreign rules can prevent a reallocation of income, Stevens said. A key provision is that for the IRS to respect a foreign restriction, it must apply to transactions between unrelated parties as well as to those between related parties, she said.

. . .

Stevens cited an example from Tansy Jefferies, a principal at RSM US LLP, who described a captive intercompany insurance provider that receives a government subsidy compensating it for 50% of its cost base.

"Should the principal still remunerate that entity based on 100% of its costs plus a markup? Fifty percent of its costs plus a markup? Fifty percent of its costs plus a markup on all the costs?" Stevens asked. "Are we supposed to put it in where it would have been but for the government aid, or should we ignore the government aid on account of the payment?"

The calculation becomes even more difficult when the markup is variable. If the arm's-length range is between 5% and 15%, and the tested party — the entity whose profits are measured in the transfer pricing analysis — falls somewhere within that, it's unclear whether the cost was actually passed through, Stevens said.

"If governments want to impose these kinds of restrictions, it behooves them to be very specific about what they mean so that taxpayers don't have uncertainty about compliance," she said.

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