In recent times, many companies have shut down their businesses due to government policies around the world. With this, the variable costs from the operation can be cut; however, the fixed cost may not be reduced immediately. In line with that, placed orders cannot be delivered to customers due to the export limitation policies from governments or cancellations from customers.
On the other hand, in many countries or industries, the demand of certain goods or services has sharply declined and even disappeared, during and/or after the time of shutting down. In order to protect market share, many companies have sold or provided goods and services to customers at a loss or increased marketing expenses to retain business objectives.
In many cases, the life cycle of some companies’ products can be suddenly turned from the maturity stage to the decline stage due to the impacts of the disease.
It can be seen that the impacts of the pandemic can increase the costs for business then turn down demand sharply at the global level, which will likely lead the world into an economic crisis.
Independent businesses incurring losses due to the extraordinary events under the global economic recession are inevitable. However, it can cause critical transfer pricing risks for businesses with related party transactions.
As suggested by the Organization for Economic Co-operation and Development and the United Nations, business losses will trigger certain scrutiny of transfer pricing issues depending on the reason and the nature of losses.
With the losses caused by the impacts of COVID-19, tax authorities will scrutinise the reasons of incurring loss. Therefore, RSM suggests companies should focus on three important aspects when explaining losses to tax authorities.
First, the impacts of the pandemic may vary from country to country. Companies in some nations may suffer many disadvantages; however, companies elsewhere may enjoy the complete opposite.
Second, the impacts of the pandemic may also vary across industries. While companies in certain industries may experience significant losses, groups elsewhere may not be hit by the pandemic at all.
And third, the sharing or absorption of losses at this time will also depend upon the risks assumed by companies. For example, the increasing marketing cost to protect market share should be borne by a company assuming significant market risk.
With the critical transfer pricing risks arising from losses or thin profitability, RSM Vietnam also suggests that companies with related party transactions should take several actions.
First, they should make assessments of the impacts of the COVID-19 pandemic on their country or industry, i.e. whether the risks are significant or not. Next, they must record and quantify the impacts based on their operational and financial data.
Third requires separation of business results between the stage affected by the health emergency and other stages. Lastly, there should be a review to ensure that the reasons for losses due to the pandemic are in line with the risks assumed by companies.
The current global situation is continuing, and Vietnamese companies are also fighting against its impacts. But even as most Vietnamese companies get back to work and after discussed business risks, RSM Vietnam will still keep track of the potential impacts of issue on Vietnamese companies and take the initiative in addressing them earlier, in order to help clients mitigate transfer pricing risks.
By Le Khanh Lam, Deputy general director RSM Vietnam
Vietnam Investment Review