Second, it will be necessary to consider how exceptional, non-recurring operating costs arising as a result of COVID-19 should be allocated between associated parties.19 These costs should be allocated based on an assessment of how independent enterprises under comparable circumstances operate. Separately, as extraordinary costs may be recognised as either operating or non-operating items, comparability adjustments may be necessary to improve the reliability of a comparability analysis. It is important to keep in mind that the treatment in a transfer pricing analysis of “exceptional,” “non-recurring,” or “extraordinary” costs incurred as a result of the pandemic will not be dictated by the label applied to such costs, but by an accurate delineation of the transaction, an analysis of the risks assumed by the parties to the intercompany transaction, an understanding of how independent enterprises may reflect such costs in arm’s length prices, and ultimately how such costs may impact prices charged in transactions between the associated enterprises (see OECD TPG paragraph 2.86, for example). Financial accounting standards should be considered in the comparability study, as they contain relevant and potentially helpful concepts in identifying the nature of costs. However, it should also be noted that even under those financial accounting concepts, there can be uncertainty as to whether particular costs are properly characterised as exceptional or extraordinary costs.
19 Depending on the duration of COVID-19 and the broader effects of the pandemic, the question may arise what constitutes an “exceptional, non-recurring” operating cost and when should such costs no longer be considered “exceptional” or “non-recurring”. As the effects of the pandemic vary by industry, business model or market, it is likely that this question can only be answered through a careful analysis of the specific costs under consideration.