Transfer Pricing Management in Crisis Scenarios

August 8, 2025

In calamitous scenarios, such as natural disasters or health crises, multinational companies face exceptional circumstances that can significantly alter their operating structures and value chains. In this context, tax authorities expect transfer pricing to be determined in accordance with the arm’s length principle, despite any commercial disruptions that may arise. This poses technical and documentary challenges that require a robust and proactive compliance strategy.  

Impact of calamities on operations and transfer pricing 

Calamities can cause significant distortions in the functions, assets, and risks (FAR) assumed by each entity of a multinational group. Changes in consumption patterns, logistical restrictions, facility closures, and contractual modifications between related parties are just a few examples of how these events can affect comparability analysis and transfer pricing determination. 

In this regard, it is crucial to assess whether operational changes that occurred during the disaster period justify adjustments to profit margins or previously applied valuation methods. Failure to take appropriate measures could lead to challenges by tax authorities, including the reconfiguration of functional profiles and the reallocation of income or losses between jurisdictions. 

Key considerations for documentation 

The preparation and retention of robust documentation is particularly critical in such scenarios. The Organization for Economic Cooperation and Development (OECD) has indicated that, in crisis situations, taxpayers should include in their documentation detailed explanations of how the extraordinary circumstances have influenced the terms and conditions of controlled transactions.  

Key aspects to consider include: 

  • Description of the specific impact of the calamity on the group’s operations and on the relevant entities;
  •  Contractual modifications made between related parties, with an emphasis on risk distribution terms; 
  • Justification of operating losses in low-risk entities, if applicable; 
  • Use of internal or external comparables adjusted to reflect extraordinary conditions;  
  • Prospective recovery analysis, in cases where compensatory adjustments have been agreed between parties within the group.  

 Assessment of losses in entities with a limited profile  

One of the most sensitive issues in times of calamity is the attribution of losses to entities classified as “limited risk”—for example, distributors or providers of routine services. Under normal circumstances, these entities are expected to earn stable and positive returns. However, in exceptional circumstances, losses may be justified when they are duly supported by operational, contractual, and functional changes. 

The OECD recognizes that there may be legitimate cases in which such entities incur temporary losses. However, it is essential to demonstrate that these losses do not result from an artificial restructuring to transfer negative results outside the jurisdiction of the parent company. 

Comparability adjustments and selection of methods 

The selection of the transfer pricing method should be reviewed based on the availability and quality of comparable financial information. In crisis situations, data from previous years may not adequately reflect the conditions of the tax period under review. Therefore, retroactive adjustments or the use of multi-year analysis may be required, as well as the incorporation of data from the business group itself when external data is inadequate. 

Taxpayers may also consider alternative methods such as the Transactional Net Margin Method (TNMM) or other approaches less sensitive to extraordinary changes in volume or cost structure, provided that the chosen methodology is properly supported and documented. 

Conclusion 

Calamities pose complex challenges for the application of transfer pricing principles, but they do not exempt companies from complying with current tax regulations. In these scenarios, transparency, documentary consistency, and anticipation of potential disputes are essential. Companies should comprehensively review their transfer pricing policies, identify adjustment risks, and rigorously document the economic reasons for any deviation from typical market behavior.  

The current environment requires strategic tax management that allows multinationals not only to mitigate tax contingencies but also to strengthen their credibility with tax authorities in times of global uncertainty. 

Source: https://www.bworldonline.com/economy/2025/07/28/688096/transfer-pricing-considerations-during-calamities/ 

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