Keeping problems at arm’s length

Following pressure from emerging economies and an increased focus on the amount of tax multinational enterprises pay, the Organisation for Economic Co-operation and Development (OECD) embarked on an action plan for governments and companies to curtail base erosion and profit shifting – the BEPS project.

Having focused largely on BEPS project actions relating to documentation requirements, intra-group services and intangibles, Luis Carrillo, tax and transfer pricing director at company information experts Bureau van Dijk, explains that the OECD and tax authorities are likely to shift their focus on to intra-group financial arrangements in the coming years.

“The international tax arena is focusing heavily on intra-group finance. It is expected increasingly to become a topic that is attacked by governments and tax authorities because of its potential to be used in profit shifting and base erosion,” he says.

Bureau van Dijk offers a range of solutions to assist treasury departments within multinational corporations price and document their intra-group financial arrangements in a manner that complies with tax requirements, and requirements under the new BEPS regime.

Mr Carrillo says it is usual for a parent company to provide financing to its foreign subsidiaries. As a result, it was usually the treasury department’s responsibility to set the intra-group interest rate charge based on their own treasury analysis.

Harmonising your intra-group finance policies in accordance with transfer pricing requirements is extremely important

However, tax authorities are now increasingly scrutinising not just the price multinationals charge in these financial transactions, but the amount and level of indebtedness for consistency with the “arm’s length principle”.

“We have tools that will help companies quantify what a suitable arm’s length charge should be, as well as what a suitable level of indebtedness should be from a transfer pricing perspective; third-party data that can be used to establish a benchmark treasury teams can then use to price these loans and meet the tax requirements,” he says.

“The key message is that if you are not doing anything about this, then you should be.  Harmonising your intra-group finance policies in accordance with transfer pricing requirements is extremely important.”

To date, the OECD has been focused on topics such as intangible property, but the latest discussion paper suggests that intra-group finance could well be within their sights.

“This is the time to do something about it. Set your policies straight and avoid the risk – be ahead of the curve for when this comes into place,” says Mr Carrillo.

“The OECD is currently undergoing its BEPS project. Within that context, we see the OECD is on target to have everything finished by 2016.”

He says that while intra-group finance is currently a topic of conversation within the BEPS project, it may well become a focus in its own right after the 2016 deadline passes.

“We are already seeing that trend globally. We are seeing governments, including the UK, Australia, Canada and South Africa, putting more of a focus on the topic of intra-group finance,” he adds.

One approach to pricing intra-group financial transactions in a manner that is consistent with transfer pricing requirements is to use data from external third-party loans in the public domain, he says.

“The typical approach is you do a credit rating exercise for the borrowing subsidiary and that credit rating exercise is key to identifying comparable lending margins from loans which have independent borrowers with the same credit rating. At BvD we have that data,” says Mr Carrillo.

“We have those loans, lending margins, credit ratings of borrowers that you can use to get your comparables which allow you to price your intra-group financial transactions in line with those requirements.”