Key elements to consider for corporate restructuring in the face of the covid-19 pandemic
According to the OECD guidelines, there is no generally accepted legal definition when referring to the concept of corporate restructuring.
However, in the transfer pricing context it refers to the cross-border reorganisation of business or financial relationships between related companies, including the termination or renegotiation of pre-existing arrangements and/or activities.
Common examples for a corporate restructuring include the transformation of a full distributor to a relatively low-function and low-risk distributor, or even to an agent or representative. There is also the transformation from a full manufacturer to that of a contract or fixed-price manufacturer providing services to a major related party. We could also mention the transfer of intangible assets or rights.
The action of restructuring is common within multinational groups and is generally motivated by business reasons such as savings from economies of scale, competitive pressures from participating in a globalised economy, the need to specialise functions or to increase efficiency among related parties by exploiting synergies generated within group members, optimising management and improving efficiency in the supply chain with the facilitation of web-based technologies, among others.
Nowadays, in view of the global situation we are going through in the face of the covid-19 pandemic, the reasons for corporate restructuring could also be based on the possibility of avoiding incurring major losses, or to maintain a certain competitive position in the markets by taking advantage of the capabilities of the multinational group as a whole. Even one of the parties involved and a member of the multinational group may accept restructuring as a preferable option to simply having to close down operations.
These reasons for corporate restructuring are recognised by OECD guidelines and tax authorities. When the taxpayer raises them, it is good practice to ensure that they are documented at the time the decision is made. This documentation will serve as support for subsequent reviews and/or audits.
However, the mere fact that the restructuring is undertaken for sound business and/or entrepreneurial reasons does not in itself answer the question of whether the transactions resulting from the restructuring between the parties involved are in accordance with the arm’s length principle.
Therefore, some key aspects that we recommend considering in a business restructuring are as follows:
- The review of the business rationale and/or motivations;
- The expected benefits/savings from the business restructuring;
- The alternatives available to the business restructuring (including a review of whether to restructure with independent third parties);
- The documentation supporting the information on the above aspects;
- The application of the arm’s length principle to the operations resulting from the corporate restructuring.
On this last point the group or multinational enterprise, or the transfer pricing advisor, should focus its examination on whether the application of the arm’s length principle to the restructuring (with implications such as transfer of assets and/or functions, termination or renegotiation) would have been remunerated or compensated between independent parties in similar circumstances.
It is therefore recommended that the taxpayer anticipates in the determination of its analysis and includes in its supporting documentation the various elements and valuation study of the restructuring, thus justifying the correct application of the arm’s length principle to the resulting transactions between the related and involved parties. This avoids disputes with the tax authorities of the country in which the restructuring takes place.
Given the economic situation that multinational groups and taxpayers are currently facing, we must not lose sight of the fact that taking action and projecting the impact of the decisions that are made will be decisive in order to avoid a lack of a well-founded response in subsequent audits to the questions that could arise from tax authorities that are assiduous to collect in the face of the general drop in revenue to the tax coffers.