One of the most important question that such uncertain times trigger, namely the context of the post-Covid19 pandemic, is whether usual transfer pricing comparability factors should remain the same or change with times.
This article proposes to tackle this question, as well as to offer solutions on how to align the existing benchmarking strategies to the new state of economy, especially in the context of the Romanian transfer pricing legislation.
One of the most important question that such uncertain times trigger, namely the context of the post-Covid19 pandemic, is whether usual transfer pricing comparability factors should remain the same or change with times.
This article proposes to tackle this question, as well as to offer solutions on how to align the existing benchmarking strategies to the new state of economy, especially in the context of the Romanian transfer pricing legislation.
Why revisions of the benchmarking strategies are required
In an usual economic environment, comparability methods using benchmarking analysis work on the underlaying assumption that, in most cases, the companies in the same industry are on equal foot at making profit and staying in business.
This assumption may not be so valid now, as many companies employ different strategies to cut costs, reach more customers or diversify. Therefore, these differences must be accounted for when performing the benchmarking studies, as to align to the arm’s length principle.
The Romanian transfer pricing legislation, as well as all OECD aligned countries, support and even encourage the utilization of adjustments as to increase the comparability degree and, as such, obtain a more reliable and reasonable inter-quartile market range.
Relevant adjustments to consider when doing transfer pricing in Romania
Including adjustments in the process of benchmarking the transfer prices will have a direct positive effect on the comparability degree of the company in regards to its strategy result set.
Taking into account the possible strategies companies may undertake, we have split the potential relevant factors to consider as such:
- Operational factors– adjustments to account for unforeseen expenses with marketing and advertising, underutilization of production capacities, inventory write-offs or even restructuring costs should be considered;
- External market factors– for example, foreign exchange risk triggered by fluctuations or the lack of undertaken risk there-of.
Alignment of benchmarking strategies within a transfer pricing file
Therefore, modifications to the usual benchmarking strategy are necessary to make sure you align with the market conditions and account for differences.
In practice, including in Romanian transfer pricing practice, this can be done by:
- Depending on the tested party situation, eliminating potential comparables that have experienced bankruptcy or operating losses, if the case;
- Eliminating companies that provide financial data outside the pandemic affected period;
- Analyzing on a year-by-year basis, for periods of economic distress, allowing for financial adjustments. In the case it is found that the company’s industry has been affected as a whole, multiple-year analysis is still a valid approach.
Taking into account the diversity of reactions each company/industry might have had to these unprecedented times, aligning benchmarking strategies should still be regarded as a case-by-case solution as to account all realistically available options to obtain a reasonable and reliable market level.
