Russia, Ukraine, and Transfer Pricing

The Ukraine/Russia conflict has caused shock waves throughout the world, triggering energy crises and inflation due to the rise in commodity prices.  Although the economies of Russia and Ukraine account for less than 2% of the world’s GDP, they are both important producers of the world’s major commodities, such as gas, wheat, and potassium. Hundreds of thousands of businesses around the world rely on Russian suppliers, as well as the low cost of labour in both countries. Many multinational enterprises (MNEs) today outsource the provision of intergroup services to these countries to decrease operating expenses.

While inflation skyrockets and conflicts continue, policymakers and the business world are facing serious problems and concerns, especially multinational companies which are threatened not only by a supply chain and energy crisis but also by closed market access in a number of regions. The OECD predicts the most severe economic deterioration will probably occur in Europe and the US.

And if all that wasn’t bad enough, the Russia-Ukraine crisis will even create transfer pricing (TP) headaches; key considerations are summarised below:

• Should Russia revoke the Intellectual Property (IP) rights of global brands that leave its territory, this could have a disastrous impact on transfer pricing policies of multinational companies and could increase taxes.

• The ripple effect of supply chain disruption means additional costs for MNEs and the fees will have to be allocated carefully within the transfer pricing structures of the companies.

• Sanctions and restructuring of supply chains mean TP policies will have to be reassessed.

• Distributors will face lower volumes of goods being traded. Such distributors would have to meet their target margin with lower sales or operate at the lower end of the arm’s length range.

• Clever benchmarking will be needed for multinational companies to account for a wider inflationary period and complex economic impacts.

Clearly, therefore, taxpayers have even more to worry about and will need to make adjustments to their transfer pricing arrangements to factor in the additional risks.

And of course, we must remember that Russia is one of the 141 member countries of the OECD Inclusive Framework, which is currently hammering out its much pilloried bi-pillared plan.

With all that’s going on, it’s hard to imagine a friendly roundtable discussion to amicably agree on tax reform.

So, the moral is, when you thought things were bad enough in terms of the conflict raging in Europe, transfer pricing can still make things worse.   At least it’s Friday…..

As always, if you’d like to discuss how this could impact your impact, drop us a line.