Optimizing Losses During a Pandemic from Transfer Pricing Perspective

It has been about six months since the coronavirus pandemic started and it has affected the world economy in various ways. Along with numerous efforts and stimulus packages, the Malaysian government and the central bank are working hand in hand to minimize the impact of COVID-19 on the economy. Many of the businesses are being asked to operate within the same old transfer pricing rules which have really affected the organization’s growth and working procedures.

The majority of companies are affected by the COVID-19 pandemic because the supply chain and production have become affected by the crisis. New market trends are indicating that parent companies of local brands are at a higher risk of suffering financial losses.

If your business has also been affected by COVID-19 and the MCO (movement control order) period, read on to find out more about some implementable tips and solutions to common issues being faced by companies. Challenges associated with tax treatment, loan schemes, rapidly changing rules and regulations of the working environment, and other tax subsidiary schemes are prevalent among businesses in Malaysia.

 

Determining the Losses for Transfer Pricing

In recent years, transfer pricing has become an essential concept for multinational enterprises (MNEs). Such large organizations depend on transfer pricing documents to implement a return on the sales pricing model for local branches. Malaysian tax authorities also prefer the transfer pricing model when they provide a possible financial upside. However, during increased financial risk and low sales, such models are not preferred.

Optimizing losses with transfer pricing

There is no definite answer to the question of whether losses should be shared among all local branches of an MNE. It depends on the type of MNE and the nature of the losses suffered by the company. The COVID-19 outbreak has led to losses in many departments of businesses, and such losses were not predicted at the start of the year.

Through transfer pricing, Malaysian companies should find out the loss and recovery period and make strategies to overcome the losses as soon as they can. The MNE can decide the nature of the analysis depending on their business sector and scale. Generally, a thorough review of the industry, financial records, future projects and the latest trends need to be examined in order to come out of the loss period stronger and better.

Another major part of transfer pricing documentation should be the research and comparison of competing businesses in specific markets. It is important to compare the effect of the economic crisis on different markets and find out some common steps that can be useful to implement throughout the business sector.

 

Financial Impact

After examining the impact of COVID-19 pandemic and economic challenges on a whole organization, it is highly recommended that you determine the effect on each entity of a company. In other words, separate teams should be responsible for conducting the financial analysis of different departments of an organization and create thorough transfer pricing documentation in compliance with the regulations of transfer pricing in Malaysia.

Other than the usual strategy of comparing the results of financial analysis with other companies in the market, your business should focus on equating the results with a maximum unaffected business period. It will clearly indicate the losses suffered by your organization. It is also important to note that most companies have to bear a higher amount of money spent on selling, hiring, marketing and administration during an economic downturn.

Even though businesses do not require the same number of assets to run their businesses during a crisis, they are still legally bound to certain obligations like leases, salaries and offices rent. Such legal contracts cannot be changed on a short-term basis, and hence, the companies continue to suffer losses due to minimum profits and regular responsibilities.

 

In a Nutshell

By the end of the COVID-19 pandemic, the economy of Malaysia will be completely transformed, just like the rest of the country. Many organizations will have to rely on loans provided by the government. Large organizations, in particular, may have more transfer pricing implications linked to the circulation of cash handouts within the numerous subsidiaries under the control of an organization.

Optimizing losses with transfer pricing

Large-scale companies are under a lot of pressure to act quickly and form strategies to control the effects of COVID-19 on the business and its partners. However, it is also essential that such actions fulfil the requirements of transfer pricing documents as failure to accomplish transfer pricing policies in Malaysia can lead to severe tax-related issues. Business owners need to find a balance between quick and effective change to ensure their strategies are beneficial for the company and economy in the long-term. For more information, feel free to get in touch with us.

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