Multinationals to Reconsider Operating + Global Transfer Pricing Strategies in Response to COVID-19
As COVID-19 continues to cause disruptions, businesses are quickly feeling the impacts of extreme government actions to flatten the curve, such as social distancing or outright shutdowns. While these may be critical steps in minimizing the damage to humans, the global economy is taking an inevitable hit. With the ripple effect lasting far beyond the run of the virus, the world will likely continue to transact its business in an altered state as this pandemic takes time to fade into our collective rear view.
Between disrupted supply chains, limited flow of goods, suspended manufacturing lines and increased remote working, customers are altering their shopping habits by purchasing essential products from the safety of their homes. Companies– especially multinationals– are strategizing to predict, to mitigate and to minimize their losses, and to assess their cash needs.
How to Move Funds
The most efficient way to move funds from one affiliate to the next is through intercompany accounts. While this method is quick and effective, the cross-border, related-party movement of cash via loans triggers transfer pricing regulations in virtually all world markets. The loans must follow arm’s length, or market-rate, standards and then document those standards in the company’s fiscal year 2020 transfer pricing study.
While there is no way to predict the full economic damage from the COVID-19 pandemic, there is reason to believe that it will change how global businesses operate in both the short and long term. This period brings weaknesses, or aspects of businesses that could be improved, to light. Companies will revisit operating and transfer pricing strategies in an attempt to build lasting changes in their businesses.
Global transfer pricing strategies are a fundamental way to mitigate damage for multinationals. Understanding and quantifying the functions performed, risks incurred and intangible assets developed throughout the organization sets a precedent for excess profit. Transfer pricing is an essential tool for the development of an optimal, universal cash flow management function that benefits the global organization during the ordinary course of operations. It is a real way to develop a universal cash-flow management strategy and move funds around the world efficiently in compliance with U.S. and foreign country transfer pricing legislation.
COVID-19 Global Disruption Impacts:
- World Market and Country Impact
- Consumer Impact: Quarantine/Social Distancing
- Intercompany/Business Segment Impact: Opportunity to Strengthen Operational + Transfer Pricing Strategies
- Positive Future Business Impact: Opportunity for a New, More Diversified and Robust Global Company
World Market and Country Impact from COVID-19
While all countries will be impacted by COVID-19, China and India are predicted to be among the hardest hit. Both countries are major suppliers of raw materials and service the U.S. and around the world, and global demand is on the decline as most countries enforce government shutdowns.
Global stock markets suffered dramatic falls due to the outbreak. In the U.S., the Dow Jones reported its largest-ever single-day fallof almost 3,000 points on March 16, 2020. Nearly all of the U.S. population is under a shelter-in-place order, severely restricting economic activity and forcing widespread layoffs. Unemployment insurance claims have spiked to historic highs. In Canada, nearly one million people have applied for unemployment benefits. Italy and Spain, which already suffer from high unemployment, are also experiencing economic setbacks.
To alleviate some of the substantial losses that will inevitably result, many countries implemented or plan to implement stimulus packages. Some Western European countries are going as far as guaranteeing wages during this crisis. Even with government assistance, it will take a considerable effort to get things back to “normal.” Our economies are interconnected and reliant on one another to thrive.
contact a member of the International Tax Team
Quarantine/Social Distancing Impacts on Consumers
Because foot traffic declined, consumers are increasingly seeking other mediums of in-home entertainment, such as online shopping, streaming and delivery services, either for a quick workout or to binge-watch their favorite shows. A shift to online shopping places older and less affluent populations at a market disadvantage.
E-commerce orders for groceries and other household items deemed essential has become a means of survival for families around the world, especially in the U.S.. The mobile application tracking company Apptopia reported thatthe average daily downloads for popular digital grocery apps Instacart, Walmart Grocery, and Shipt have surged since February.
Where digital grocery apps and e-commerce sites have seen increased usage as a result of social distancing, businesses such as restaurants, bars, and gyms have shut down or limited orders to takeout and delivery. Most small businesses have closed indefinitely.
Intercompany/Business Segment Impact: Opportunity to Strengthen Operational + Transfer Pricing Strategies
The coronavirus outbreak exposed many companies’ vulnerabilities in supply chains and business operations. Companies that do not diversify their supply chain sources between different geographic markets are at a disadvantage. Social distancing impacts manufacturers that rely on a large labor force to work closely together. For other manufacturers, it’s not necessarily labor or raw materials that are in short supply, but the ability to have their product shipped by logistics companies. Border closures also impact imports and exports.
A high level, universal approach to cash flow management is the most efficient way for companies to operate. This was true before the pandemic, though hard times bring weaknesses to light. Not all companies have coordinated global financing mechanisms, such as a treasury function, cash pooling, cashflow management, and repatriation strategies. Companies need to evaluate their operating budget projections to develop a strategy for long-term cash flow preservation.
While transfer pricing can move cash within an organization across its multiple borders, it requires careful planning and strategies to do so in compliance with U.S. and foreign country laws and regulations. Transfer pricing is the best tool to develop a cash flow management process because it allows for the predictability of funds in certain locations around the world. Some transfer pricing strategies are not as complex, requiring changes in legal contracts and signing authority to change the function/risk profile– and thus profit expectation– of one entity concerning another. Other strategies are more complex, such as the transfer of intellectual property ownership to a jurisdiction with the most need. In this case, the assumption is that a valuable intangible asset, like technology or marketing related, will drive higher, non-routine profits to the owner.
Positive Future Business Impact: Opportunity for a New, More Diversified and Robust Global Company
What strategies should business executives consider to hedge the inevitable negative impact? Once they discover the gaps in tools, information, people or processes to address, they can better protect their companies from extreme damage related to disruptive events. The solution could relate to improved cash flow management processes, diversification of product sourcing and supply chains or updating global transfer pricing and international tax strategies, among other considerations.
After the COVID-19 crisis dissipates, companies need to remain mindful of the lessons learned and make proactive investments for the next disaster. The best defense is to perform adequate research and build a strategy to anticipate and manage new developments. Lasting changes to world business prompted by COVID-19 are inevitable. Companies should make lasting changes into their businesses to mitigate damages, to build a new and improved firm that is stronger and more diversified to withstand similar damage with any future economic event.
For additional information on how transfer pricing analysis is a fundamental tool for managing the movement of cash between affiliated entities and for developing a global cash flow management strategy, contact Marina Gentile, Lead, Global Transfer Pricing Strategies.
Authors: Marina Gentile | [email protected] and Andrew DeSimone | [email protected]
International Services Tax
