In recent years, intra-group financial transactions have been increasingly scrutinized in tax audits.
Push-back by the tax authorities often leads to substantial additional taxes and double taxation.
On 11 February 2020, the OECD published the long-awaited guidelines on financial transactions. This is the first time that multinational groups are provided with global OECD guidelines on how to structure and price intra-group financial transactions.
In over 40 pages the guidelines cover various areas – from loans and cash pooling to guarantees, hedging and captive insurance.
In this article, we highlight three core aspects.
Up to now, many companies and tax audits merely focused on the appropriateness of the transfer prices – e.g. the interest rate. In the future, companies will also have to answer the following questions:
To answer these questions, the perspectives of both the lender and the borrower need to be considered.
The main question arising when pricing most financial transactions is how the borrower’s or guarantor’s creditworthiness can be determined. It is generally agreed that this is done by a credit rating analysis. However, a wide range of rating approaches have been observed in practice – these range from a standardized group rating applied to all group companies, over the individual stand-alone ratings to ratings reflecting implicit group support effects, the so-called "halo effect".
The OECD guidelines state what taxpayers should consider when determining individual ratings. In particular, they focus on the effects of implicit group support – for example, driven by the strategic importance of a particular group company.
In addition, the OECD clarifies that the credit rating of a specific financial instrument may differ from the issue credit rating of the receiving group entity.
In many cash pools, the intra-group debit and credit rates are set similar to the market rates that the cash pool leader has agreed with a bank. This results in a large spread between debit and credit rates, and therefore in a netting profit for the cash pool leader. From a tax perspective, a main question is whether and how the cash pool participants should benefit from saving bank interest payments and such netting profits.
The OECD guidelines recommends that cash pools should be analyzed holistically.
Furthermore, in line with the ConocoPhilips case law in Norway, the OECD confirms that long-term balances in the cash pool should be priced like longer-term loans.
The OECD's publication could be the ideal external trigger for treasury managers to review the contractual, economic and pricing arrangements of the various business relationships in intra-group financing together with their colleagues from the tax department in course of FY 2020.
Our recommendation is to design transfer pricing guidelines that help the treasury department to implement a pricing logic in its day-to-day business that is appropriate from a tax perspective and simultaneously reducing the administrative workload for the tax department in preparing transfer pricing compliance documentation for treasury transactions.
Our experts are happy to assist you with this endeavor.
Source: KPMG Corporate Treasury News, Edition 99, March 2020
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