Given the increasing importance of intercompany funding resulting from treasurers’ focus on making better use of group-wide liquidity, this article highlights some of the hurdles that multinational groups must negotiate when designing and implementing tax transfer pricing policies.
Transfer pricing for treasury transactions covers a wide range of activities and issues. It would be impossible to cover all of them in a relatively short article. Instead, I have collated five common statements treasurers make when I talk to them about the subject, and these responses indicate that there is a transfer pricing risk.
Statement 1:
“Group tax is responsible for transfer pricing. In treasury we just set and apply the policies.”
The risk: Without clear communication and a good relationship between treasury and group tax departments, it is likely that misunderstandings will arise and this could lead to wasted time or, at worst, the risk of fines/penalties. Best practice is that treasury/tax work hand in hand on transfer pricing matters with treasury bringing its expertise on pricing, market conditions and treasury systems and group tax bringing its expertise on tax transfer pricing documentation, dealing with tax authorities and evidence requirements.
This is how it should work and it is how it normally works. Nonetheless there is a substantial minority of groups where treasury and group tax departments operate in silos.
My recommendation: Get talking if you are not doing so already.
Statement 2:
“We have a great policy. We established it in 2017 with the help of a specialist transfer pricing adviser and we have applied it ever since.”
The risk: In 2020 the Organisation for Economic Co-operation and Development (OECD) published detailed transfer pricing guidelines focused specifically on pricing intercompany loans, cash pools, guarantees, hedging transactions, and captive insurance. These OECD rules provide a clearly defined framework for companies to price intercompany financial transactions and, in turn, for tax authorities to assess, and in some cases challenge, them. One example among many is that the rules prescribe the approach to define the creditworthiness of a borrowing entity, taking into account its group membership.
As a result, almost all groups that have reviewed their policies since 2020 have found at least one element of their policy that has needed to be updated in order to comply with the OECD guidance. Many groups have performed these reviews and updates already, but a significant number have not.
My recommendation: Update the policy.
Statement 3:
“We have excellent benchmarks. We use the fixed rates that were agreed on our external 2020 Term Loan B (TLB) as benchmark for our internal lending transactions.”
The risk: The external TLB may have been a great benchmark for group loans advanced in 2020 but it is not an appropriate benchmark now. Base rates, swap rates and credit spreads have moved significantly this year and a 2020 benchmark will significantly understate current arm’s-length conditions.
Outdated benchmarks will be a much bigger issue in 2023 than in previous years due to the recent changes in market interest rates.
My recommendation: Now is the time for using up-to-date benchmarks.
Statement 4:
“We have an excellent relationship with our bank. It provides us with indicative quotes whenever we have a new intra-group transaction.
The risk: I used to hear this all the time, but less frequently now. Intuitively using a bank to provide a quote is an excellent way to price a related party loan but this is dangerous for transfer pricing purposes.
The new OECD guidance states clearly that bank quotes are not an acceptable form of evidence for transfer pricing purposes any more and tax authorities can/will ignore them.
My recommendation: If you have a good relationship with the bank then still ask for its input when setting the interest rate. But when you come to document it, use a transfer pricing benchmark that can be defended in a tax audit.
Statement 5:
“We perform a detailed analysis of every loan and perform a separate benchmarking study for each and every related party transaction that we have.”
The risk: I must admit that I do not hear this comment in practice very often but this example does enable me to make a point, so bear with me.
Size matters in transfer pricing for financial transactions and it often does not make sense to perform the same depth of analysis for all of your intra-group transactions.
For example, the tax at risk on the transfer pricing for a one-year $5m loan is 100 times lower than the tax at risk on a 10-year $50m loan.
My recommendation: It depends on the group’s mix of transactions, but often I find it is appropriate for groups to have a standard policy that applies to 80-90% of intra-group loans with only the largest loans being evaluated and documented on a case-by-case basis.
To discuss this topic further, please contact David at david.mcdonald@pwc.ch or Etienne Michaud, Senior Manager, PwC, at etienne.michaud@pwc.ch.
