Transfer Pricing and financial transactions
Many multinational enterprises rely on financial transactions in order to provide funding within the group. Aside from long-term funding, this potentially includes acute liquidity issues and other operational needs. Such financing activities may be complicated and extensive. Following revisions to the OECD Guidelines, which describe transfer pricing doctrine in detail, financial transactions are now firmly on the transfer pricing agenda. Tax Authorities have changed their approach to this matter, and we frequently see intercompany loans and treasury operations receiving scrutiny from the authorities.
Developments in the field of Transfer Pricing
In recent years, many countries (including the Netherlands) have implemented intricate transfer pricing legislation and guidance. Simultaneously, companies have worked to ensure that their (cross-border) intercompany flows of goods, royalties and management fees and other charges are well documented and in line with the arm’s length principle and the relevant regulations.
In recent years, the importance of financial transactions (e.g. intercompany financing, treasury functions and support services) has finally been recognised, and financing arrangements now form a key component of transfer pricing requirements. In many countries, including the Netherlands, this is also incorporated in the documentation obligations for the Master File.
Accurate delineation of financial transactions
As the Tax Authorities’ focus on financial transactions increases, so too does their expertise in this area. The application of the arm’s length principle with regard to financial transactions, and the documentation of the relevant policies, is therefore increasingly important for taxpayers.
Following revisions to the OECD Guidelines on financial transactions, factors such as the economic substance of transactions and an entity’s ability to bear risks within the group, have come under greater scrutiny. Each individual arrangement requires an analysis. Therefore, the first important step towards substantiating the arm’s length nature of intercompany financial arrangements, is the delineation of the transactions.
How can proper structuring and substantiation of intercompany financial arrangements benefit my company?
Given the extra attention that intercompany financial transactions may receive from Tax Authorities, it is important that the arrangements are properly documented and sufficiently substantiated. This lowers the risk of discussions with, or corrections by, Tax Authorities.
Simultaneously, analysing and documenting the arrangements may offer insights into areas where there is room for optimisation (both from a business-economic and a tax perspective).
As intercompany financial transactions fall within the scope of the strict documentation obligations (i.e. the Master File, the Local File and the Country-by-Country report), you may even be legally obligated to document and report certain specifics.
How to substantiate intercompany financing arrangements
If there are intercompany financial transactions that require substantiation, the following may for example be relevant:
- Determining an arm’s length interest rate on an intercompany loan;
- Determining an arm’s length remuneration for intercompany financing activities;
- Determining an arm’s length compensation for credit guarantees;
- Determining how costs and benefits from centralised treasury functions (e.g. a cash pool) should be allocated, and who should receive what level of remuneration.
Our Transfer Pricing experts would be happy to discuss these matters with you. Please feel free to contact us to discuss how we may be of service.