Transfer Pricing Will Likely Attract Additional Scrutiny for 2009 Tax Year
2009 will likely go down as one of the worst financial slumps in history. The economic
downturn has resulted in companies realizing losses at every level of their supply chains.
This in turn has far‐reaching implications on the transfer pricing methods applied by many
taxpayers. At the same time, tax authorities, facing increased pressure to collect additional
tax revenues, will look to impose transfer pricing adjustments.
Most taxpayers have adopted a profit‐based approach in setting their “arm’s‐length”
transfer pricing policies. During normal economic times, such an approach allows taxpayers
with mature businesses to earn acceptable profits in the tax jurisdictions in which they
operate. During an economic downturn, however, a multinational enterprise (“MNE”) may
incur significant losses and the same transfer pricing policies may cause distortions in the
operating results of individual entities. Such distortions include “limited risk” distributors
with significant losses, or contract manufacturers not able to cover fixed costs.