New regulations have increased the need for robust transfer pricing analysis
Now, more than ever, it is important that multinationals maintain a robust approach to the arm’s length pricing of:
- Intercompany loans, receivables and factoring
- Intercompany financial and performance guarantees
- Participation in cash pools
- Hedging transactions
- Captive insurance arrangements
- Thin capitalization and debt capacity substantiation
- Real estate financing and other specialized transactions
Local tax administrations and financial transactions pricing
Local tax administrations are more intensely scrutinizing financial transactions pricing during tax audits. In the meantime, major events are occurring in the financial markets, such as the phaseout of LIBOR benchmarks and measures by Central Banks to curb inflation. The latter generally leads to increased interest rates. These global developments pose many questions for multinational taxpayers’ financial transactions transfer pricing policies.
How can we help with financial transactions transfer pricing?
Our financial economists have leading expertise in this area and are able to assist with various financial services:
- Help plan intercompany financial arrangements to assist with liquidity and other business objectives, while minimizing tax risk
- Perform diagnostics on an organization’s intergroup financial transactions, in light of the new OECD Guidance and the ever-changing local tax rules
- Design and help implement practical transfer pricing policies and operating procedures
- Prepare robust defense files which document the economic analysis and procedures
- Help MNEs navigate the tax controversy landscape
Our team of specialists has significant experience in working with the Dutch tax authorities. We are able to help resolve disputes related to financial transactions transfer pricing or as part of an APA/MAP process. Through our access to the global KPMG network, we can provide assistance with local issues worldwide.
FAQ
What are the transfer pricing risks associated with intercompany loans?
Intercompany loans are receiving increasing attention from tax authorities worldwide. Key areas of scrutiny include the borrower’s creditworthiness, the interest rate charged, the loan term and whether an independent third party would have been willing to provide financing under similar conditions. If the terms of the loan are not consistent with the arm’s-length principle, tax authorities may impose transfer pricing adjustments that result in additional taxation, penalties or double taxation. A robust transfer pricing analysis and supporting documentation can help manage these risks.
When is transfer pricing documentation for financial transactions required?
Transfer pricing documentation is important for financial transactions such as intercompany loans, cash pooling arrangements, guarantees, captive insurance structures and other treasury activities. Tax authorities increasingly expect multinational enterprises to demonstrate that these transactions are conducted on arm’s-length terms. Well-prepared documentation supports the pricing applied, the commercial rationale for the transaction and the allocation of functions, assets and risks within the group. This can help prevent disputes during a tax audit or facilitate a more efficient resolution where questions arise.
How do tax authorities assess cash pooling and intragroup financing arrangements?
Tax authorities assess whether the benefits and risks of cash pooling and other intragroup financing arrangements are allocated in accordance with the arm’s-length principle. This includes evaluating the role of the treasury function, the position and remuneration of the cash pool leader, the contributions of participating group entities and the compensation they receive. Given the OECD’s expanded guidance on financial transactions and the increasing body of local case law, it is essential to regularly review and properly document these arrangements.
