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According to the OECD guidelines, there is no universally accepted legal definition when referring to the concept of corporate restructuring.
However, the Transfer Pricing context 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 of 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. 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. It 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.
Today, given 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 maintaining 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 have to close down operations.
The OECD and Tax Authorities’ guidelines recognise these reasons for business restructuring. When the taxpayer raises them, it is good practice to ensure that they are documented when the decision is made because such documentation will serve as supporting elements for subsequent reviews and/or audits.
However, the simple fact that the restructuring is carried out under sound business and/or entrepreneurial motivations does not answer the question of whether the transactions resulting from the restructuring between the parties involved are in line with the arm’s length principle.
Therefore, some key aspects that we recommend examining in a corporate restructuring are the following:
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 reimbursed or compensated between independent parties in similar circumstances.
We, therefore, recommend that the taxpayer anticipates in the determination of its analysis and includes in its supporting documentation the various elements and study of the valuation of the restructuring to justify the correct application of the arm’s length principle to the resulting transactions between the related and involved parties to avoid 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 avoiding the lack of a reasoned response in subsequent audits to the questions that could arise from tax authorities that are attentive to collect in the face of the general drop in revenue to the tax coffers.