Elizabeth Stevens Comments in Bloomberg on Year-End Tax Guidance
Companies are facing a problem as they prepare to close their books at year-end: Either guess correctly how tax authorities will handle disruptions caused by Covid-19 or risk audits.
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“But this is the year where something crazy happened,” she said.
For example, a company may have decided at the beginning of the year the correct operating margin for one of its entities based on the arm’s length principle. The arm’s length principle—the cornerstone of transfer pricing—requires related entities to interact as if they were unrelated.
The unusual circumstances of this year mean the company may have to change its numbers—but it isn’t clear how.
“A lot of companies think it’s likely that a target set at the beginning of the year is not right, not an arm’s-length outcome, but they’re not sure how to adjust it,” Stevens said.
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It’s unclear how companies should adjust the margins for low-risk entities if there are losses across the group.
“That is a set of issues on which guidance before year-end would be very helpful: Where does the profit and cash land when the dial stops?” Stevens said.
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