Financial Transfer Pricing
Within multinational enterprises, financial transactions are key to obtaining funding across the group, service liquidity provision, long-term funding and other operational and tax needs. Often, these transactions are the most extensive and material within such enterprises. In conjunction with revisions made to the OECD Guidelines on this topic, financial transactions have become more prominent on the transfer pricing agenda. There has also been a significant shift in the way in which tax authorities have sought to analyse and challenge intercompany loans and other support measures and treasury operations from a transfer pricing perspective.
Over the last few years, countries (including the Netherlands) have implemented more detailed transfer pricing legislation and guidance, while companies have tried to ensure that their cross-border intercompany product flows, royalties and management charges are set on an arm’s length basis and are properly documented. Unfortunately, the same cannot always be said for intercompany financing and the provision of treasury and support services. Historically, intercompany financial transactions were subject to less scrutiny than other transactions, amongst others due to the existence of safe harbours, limited guidance in this area by the OECD and the fact that they were sometimes considered too complex.
This has changed, because these issues have come to be categorised as being of the utmost importance, since intercompany financing arrangements now form a key part of the transfer pricing documentation requirements for the Master File under OECD BEPS recommendations (which have been implemented accordingly in Dutch law).
In light of the increase in information transparency, these arrangements must now be properly documented and substantiated as well. In this respect, tax authorities are focusing on the application of the arm’s length principle to these transactions, and growing awareness and expertise in this area is to be expected.
Accurate delineation of transactions
With the revisions made to the OECD Guidelines on financial transactions, greater scrutiny has been placed on the economic substance of these transactions, the options realistically available to the counterparties, and the ability/capacity to bear risk within entities of a multinational enterprise. In this regard, financial transactions now require accurate delineation, the first important step in substantiating intercompany financial arrangements.
How to substantiate intercompany financing financial arrangements
If financial transfer pricing becomes relevant for your company, the following issues and related questions may arise:
- Determining an arm’s length interest rate on an intercompany loan
- Determining arm’s length remuneration for intercompany (intermediate) financing activities (in case of flow-through companies)
- Determining arm’s length compensation for the commitment by a guarantor to reimburse a lender if a borrower fails to repay a loan (i.e. a (credit) guarantee)?
- What are the transfer pricing aspects of a centralised treasury function (e.g. a cash pool)? How should the parties involved be remunerated, and/or how should benefits generated by centralising such functions be allocated?
How does a proper set-up and substantiation of financial intercompany arrangements benefit my company?
- Because financial intercompany transactions are also captured by the strict transfer pricing documentation requirements (i.e. Master File and Local File), proper documentation and substantiation of the financial positions at stake minimise the possibility of being non-compliant (and thus risking severe administrative and/or criminal penalties); and/or
- If potential adverse tax implications are identified, this may provide you with the opportunity to (re)consider the set-up of your intercompany financial arrangements (and even optimise these arrangements from a tax perspective).
If you require more information on this topic, please request our flyer or contact our Transfer Pricing experts directly for details, free of charge.