Given the current economic environment, it is possible that independent parties may not strictly hold another party to their contractual obligations, particularly if it is in the interest of both parties to renegotiate the contract or to amend certain aspects of their For example, unrelated enterprises may opt to renegotiate a contract to support the financial survival of any of the transactional counterparties given the potential costs or business disruptions of enforcing the contractual obligations, or in view of anticipated increased future business with the counterparty. This behaviour should be considered when determining whether or not associated parties would agree to revise their intercompany agreements in response to COVID-19.
OECD COVID-19 TPG paragraph 43
Category: TPG2020 Guidance on the transfer pricing implications of the COVID-19 | Tag: Accurate delineation, COVID-19, Interest of both parties, Modification to contractual arrangements, Renegotiation of the existing contractual arrangements, Separate entity
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- OECD COVID-19 TPG paragraph 42In response to the COVID-19 pandemic, independent parties could seek to renegotiate certain terms in their existing agreements.25 Associated parties may also consider revising their intercompany agreements and/or their conduct in their commercial relationships. Tax administrations should therefore review the agreements and/or the...
- OECD COVID-19 TPG paragraph 44For example, assume that Distributor X purchases products, the controlled transaction, from a related party Company Y, and sells these products to third party customers. Further assume that a major customer of Distributor X does not pay for products purchased within its standard...
- OECD COVID-19 TPG paragraph 45Determining whether a renegotiation of a commercial arrangement (including pricing under the arrangement going forward and any potential compensation for the renegotiation itself) represents the best interests of the parties to a transaction requires careful consideration of their options realistically available26 and the...
- OECD COVID-19 TPG paragraph 46The above analysis outlines the factors that should be considered when determining whether associated parties may at arm’s length consider revising their intercompany agreements and/or their conduct in their commercial relationships as a consequence of the COVID-19 pandemic. However, it is important to...
- OECD COVID-19 TPG paragraph 10The challenges associated with performing a comparability analysis may vary depending on the impact of the COVID-19 pandemic on the economically relevant characteristics of the accurately delineated transaction. For example, if a controlled transaction is covered by a pre-existing intercompany agreement (for example,...
- OECD COVID-19 TPG paragraph 37Finally, the COVID-19 pandemic has created conditions in which associated parties may consider whether they have the option to apply force majeure clauses, revoke or otherwise revise their intercompany agreements. This may impact the allocation of losses and COVID-19 specific costs between associated...