Coping with the Economic Downturn: Comparing Arm's Length Benchmarks During a Volume Recession

Sat May 01 16:24:38 EDT 2010
By Dr. Harlow Higinbotham with former NERA Consultant Dr. Seen Meng Chew

The 2007-2009 economic crisis was a period of economic recession unprecedented since the Great Depression of the 1930s. The collapse in global demand had an adverse impact on economic performance across many sectors and firms, and it had significant implications for the transfer pricing practices of many multinational companies. The severe volume contraction affected entire global supply chains for many companies, forcing them to reevaluate the routine/functional versus non-routine/entrepreneurial roles of their constituent entities in determining arm's length transfer prices. This NERA paper analyzes the major problems imposed by the economic downturn on traditional transfer pricing analyses and illustrate some practical solutions. The authors begin by describing the economic crisis and its impact on supply chains, as well as benchmarking and comparability analysis in transfer pricing. They then use two illustrative case studies to highlight these problems and recommend methods to overcome them. The paper concludes with suggestions on additional issues of concern to transfer pricing practitioners during severe volume recessions like the present one.

A substantially similar version of this article was published in the May 2010 edition of the International Tax Review.