Recent developments have increased the need for robust transfer pricing analysis and documentation
Chapter X of the 2022 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”) and the Dutch Transfer Pricing Decree 2022 contain extensive guidance for financial transactions. Before the update in 2022, the OECD Guidelines contained little to no guidance on financial transactions. The new OECD guidance has also triggered tax authorities around the globe to increasingly scrutinize financial transactions. Local transfer pricing guidance/ regulations, such as in the Netherlands and Germany, may also deviate to some extent from OECD guidance, which may create further complications. In addition, local transfer pricing case law for financial transactions is ever increasing (including the Dutch ‘onzakelijke lening’ or ‘unbusinesslike loan’ case law), which also is a relevant factor to consider.
Therefore, now, more than ever, it is important that multinationals maintain a robust approach to the arm’s length pricing of:
- Intercompany loans/ receivables
- Thin capitalization and debt capacity
- Participation in cash pools, including the pricing of balances and benefit allocation
- Intercompany financial and performance guarantees
- Captive insurance arrangements
- Hedging, factoring, credit default swaps and other specialized financial transactions
How can we help with financial transactions transfer pricing?
Our financial transactions transfer pricing specialists have leading expertise in this area and are able to assist with:
- Setting up and structuring intercompany financial arrangements to assist with liquidity and other business objectives, while minimizing tax risk;
- Perform diagnostics on organization’s existing intra-group financial transactions, in light of the new OECD and local Guidance/ case law;
- Design and help implement practical transfer pricing policies and operating procedures for financial transactions, including intercompany agreements;
- Assist with designing transfer pricing policies for central treasury operations/ inhouse banks, whilst assisting with practical advice on practical implementation;
- Design internal governance framework for treasury teams to follow to help simplify processes associated with pricing intra-group financing arrangements, whilst aligning tax and treasury objectives;
- Prepare robust transfer pricing documentation, which evidences and documents the arm’s length nature of the intercompany financial transactions;
- Help MNEs navigate the tax controversy landscape if disputes arise in relation to intercompany financial transactions
Our Financial Transactions team has significant experience with the above, including dealing with the Dutch tax authorities.
We are also able to help resolve disputes related to financial transactions transfer pricing or as part of an APA/MAP process, together with our Team of Tax Controversy specialists. Through our access to the global KPMG network, we can provide assistance with local Financial Transaction issues worldwide.
FAQ
How should the arm’s-length interest rate for an intercompany loan be determined?
The arm’s-length interest rate for an intercompany loan depends on the specific facts and circumstances of the transaction. Relevant factors include the borrower’s creditworthiness, the loan term, repayment conditions, currency, collateral, market conditions and the functions and risks assumed by the parties involved. Tax authorities increasingly scrutinize intercompany financing arrangements and expect taxpayers to support their pricing with robust transfer pricing analyses and documentation. A well-supported approach can help reduce the risk of transfer pricing adjustments and disputes.
What transfer pricing considerations apply to cash pooling arrangements?
Cash pooling arrangements must be structured and priced in accordance with the arm’s-length principle. Key considerations include the allocation of benefits among participants, the role and remuneration of the cash pool leader, the risks assumed by each participant and the impact on liquidity management across the group. The OECD Transfer Pricing Guidelines provide specific guidance on cash pooling, and tax authorities increasingly expect multinational groups to document how the benefits and risks are allocated within the arrangement.
Why is transfer pricing documentation for financial transactions becoming increasingly important?
Recent developments, including the OECD’s guidance on financial transactions and increased scrutiny by tax authorities, have significantly raised the importance of transfer pricing documentation for intercompany financing arrangements. Documentation should demonstrate that financial transactions, such as loans, guarantees, cash pooling structures and other treasury activities, are consistent with the arm’s-length principle. Robust documentation can help support a company’s position during a tax audit, reduce tax risk and facilitate the resolution of transfer pricing disputes.
