Why This Book? - IBFD

Transfer Pricing and Intra-Group FinancingWhy this book?Transfer Pricing and Intra-Group Financing is a practical guide that addresses thetransfer pricing issues related to intra-group financing transactions. Currently, taxauthorities and transfer pricing professionals are focusing on these transactions – andthe application of the arm’s length principle. This growing attention is largely dictated bytwo factors: (i) the relative importance that financial transactions have in multinationalgroups and the significant amounts involved; and (ii) the increased awareness oftax authorities (and taxpayers alike) who, having for many years primarily dealt withtransfer pricing issues related to goods and services, are now being confronted with thecomplexity of the pricing of these financial transactions. The so-called “credit crunch”,which began in late 2007 and in mid-2008 exploded on the financial services industryand the global economy, has also heavily influenced this field of application of the arm’slength principle. The impact of the financial markets on this area of transfer pricingcontinues today.Title:Editor(s):Date of publication:ISBN:Type of publication:Number of pages:Terms:Price:Transfer Pricing and Intra-Group FinancingAnuschka Bakker, Marc M. LeveySeptember 2012978-90-8722-152-2Print Book 580Shipping fees apply. Shipping information isavailable on our websiteEUR 120 / USD 150 (VAT excl.)Order informationTo order the book, please visit www.ibfd.org/IBFD-Products/shop. You can purchasea copy of the book by means of your credit card, or on the basis of an invoice. Ourbooks encompass a wide variety of topics, and are available in one or more of thefollowing formats: IBFD Print books IBFD eBooks – downloadable on a variety of electronic devices IBFD Online books – accessible online through the IBFD Tax Research PlatformIBFD, Your Portal to Cross-Border Tax Expertise

Tableofof apter 1.11.Chapter 1.2.2.2.2.2.3.2.3.2.3.1.IntroductionGeneral considerations: The change in (market)circumstancesThe OECD framework and selected internationaldevelopmentsTypical types of intercompany financial transactionsThe treasury functions: Typical characterization ofthe treasury departmentIntercompany loans, the issue of hidden capitalizationand the arm’s length principle: Theory and practiceHybrid financingFinancial guarantees and performance guaranteesCash management and optimizationFactoringForeign exchange and commodity risk managementCaptive insuranceEstablishing an intra-group policy1030323945495153Australia57Corporate income tax frameworkCorporate income tax systemTaxable entitiesTaxable incomeTax lossesTax ratesInteraction of thin capitalisation and transfer pricinglegislationOverview of intra-group financing in AustraliaHistorical contextRecent developmentsProposed legislation rewriteIntercompany loansLoan or equity575757585858xi147859595960636465

Table of Transfer pricing considerations in relation to debtand equityProfit participating loans (PPLs) and hybrid debtinstrumentsInterest chargedArm’s length pricing considerations arising fromTR 92/11Considerations arising from TR 2010/7Transfer pricing approachSteps in the application of the above approachImpact of ordering of the above stepsPotential adjustments when the financingtransactions produce non-commercial outcomesExampleGuarantee feesA parent company funding a subsidiary unable toborrow the funds it needs on a stand-alone basisExampleA parent or offshore associate provides debt fundingto a group company that has the financial strength tobe able to borrow the debt funding it needs withoutsupport from its parent companyExampleA parent guaranteeing the debt of a wholly ownedgroup company that is unable on a stand-alone basisto borrow the debt funding it needsExampleA parent company provides a guarantee to asubsidiary that is able to borrow the funds it needson a stand-alone basis, to allow the subsidiary toaccess funding at the lower cost available to theparentExampleTransfer pricing methodsUse of a range of resultsCash poolingInterestCash pooling for administrative convenienceOperation of an in-house “bank”Remuneration CPLCash pooling for administrative convenienceOperation of an in-house 3848586868687888889

Table of 11.Chapter 3.2.6.3.2.7.3.2.8.3.2.9.3.2.10.Allocation of cash pool benefitDocumentationAdvance pricing arrangements (APAs)FactoringLeasingOther forms of financing and credit risk arrangementsBranchesDocumentationOverview of documentation requirementsApplication of the four-step process for financingtransactionsContemporaneous documentationTiming aspectsPenalty aspectsBurden of proofFurther 7Corporate income tax frameworkCorporate income tax systemTaxable entitiesTaxable incomeTax lossesTax ratesInteraction of thin capitalization and transfer pricinglegislationIntercompany loansLoan or equityProfit participation loans (PPLs)Interest chargedHistorical backgroundIndexes, concepts and acronymsInterest range scenariosTransfer pricing (TP) methodsThin cap rulesExchange controls and Central Bank registrationIOF taxDisguised distributions of profitsIntercompany back-to-back loansInterest on net 104104105112115120122125126128129

Table of .4.3.5.3.6.3.7.3.8.3.9.3.10.Chapter ated loansHedgingWithholding income taxGuarantee feesA parent guaranteeing the debt of a wholly ownedgroup company that is unable on a stand-alone basisto borrow the debt funding it needsA parent or offshore associate provides debt fundingto a group company that has the financial strength tobe able to borrow the debt funding it needs withoutsupport from its parent companyA parent company funding a subsidiary unable toborrow the funds it needs on a stand-alone basisA parent company provides a guarantee to asubsidiary that is able to borrow the funds it needson a stand-alone basis, to allow the subsidiary toaccess funding at the lower cost available to theparentTransfer pricing methodsUse of range of resultsRequirement for outcomes to make commercialsenseCash poolingInterestAllocation of cash pool benefitDocumentationAPAFactoringLeasingOther forms of financing and credit risk 130131131Canada141Corporate income tax frameworkCorporate income tax systemTransfer pricingRelevant legislationApplicable jurisprudenceTransfer pricing methods 135135135135135136138138138139

Table of 4.4.4.4.5.4.6.4.7.4.7.1.4.7.2.4.7.3.Documentation requirementsAdvance pricing arrangementsTaxable entitiesTaxable incomeOrdinary tax lossesTax ratesInteraction between thin capitalization and transferpricingIntercompany loansLoan or equityProfit participating loansInterest chargedTransfer pricing methodsGuarantee feesA parent guaranteeing the debt of a wholly ownedgroup company that is unable on a stand-alone basisto borrow the debt funding it needsA parent or offshore associate provides debt fundingto a group company that has the financial strength tobe able to borrow the debt funding it needs withoutsupport from its parent companyA parent company funding a subsidiary unable toborrow the funds it needs on a stand-alone basisA parent company provides a guarantee to asubsidiary that is able to borrow the funds it needson a stand-alone basis, to allow the subsidiary toaccess funding at the lower cost available to theparentTransfer pricing methodsUse of a range of resultsRequirement for outcomes to make commercial senseCash poolingInterestRemuneration – Cash pool leaderAllocation of cash pool benefitAPAFactoringLeasingOther forms of financing and credit risk arrangementsDerivativesForeign exchangeHybrid financial 168168

Table of Contents4.8.4.8.1.4.8.2.4.8.3.4.9.Chapter orsNatural resource industryFinancing hina173Corporate income tax frameworkCorporate income tax systemTaxable entitiesTaxable incomeTax lossesTax ratesTransfer pricing and thin capitalization legislationIntercompany loansLoan or equityProfit participating loans (PPLs)Interest chargedTransfer pricing methodologiesAcceptable transfer pricing methodsGuarantee feesA parent company that guarantees the debt of a fullyowned company that is unable to obtain the financeitself that it needsA parent or offshore associate provides funding to agroup company even though it is capable and has thefinancial strength to borrow the funding it needsParent company provides funding to a subsidiarythat is unable to borrow the funds it needsA parent company becomes a guarantor for asubsidiary that is able to borrow the funds it needson a standalone basis, but does so in order for thesubsidiary to gain funding at the lower cost availableonly to the parentTransfer pricing methodsUse of range of resultsRequirement for outcomes to make commercial senseCash poolingInterestRemuneration of CPLTransfer pricing treatment on cash vi186186186186187188188189190191191

Table of 8.1.5.8.2.5.8.3.5.8.4.5.9.5.10.Chapter 6.2.FactoringLeasingOther forms of financing and credit riskarrangementsDerivativesHybrid financial instrumentsForeign exchangeTransfer pricing for other financing and credit riskarrangementsSectorsFinancial services industryOil and gas industryFinancing start-upsFinancing and leasing in the automotive industryTransfer pricing e income tax frameworkCorporate income tax systemTaxable entitiesTaxable incomeTax lossesTax ratesIncomeCapital gainsInteraction between thin capitalization and transferpricing legislationMaximum interest rate and thin capitalization rulesShareholder loans and current accountsInterest served to related partiesThin capitalization rulesLimitation of interest expenses deduction linked tothe acquisition of participation sharesTransfer pricing rulesAnti-abuse provisionsInteraction between thin capitalization rules andtransfer pricing rulesInterest rateDebt-to-equity ratioIntercompany 19220

Table of 6.7.6.8.6.8.1.6.8.2.6.8.3.6.9.6.10.Chapter 7:7.1.7.1.1.7.1.2.7.1.3.7.1.4.Loan or equityProfit participating loans (PPLs) and hybridinstrumentsIllustration of relevant case law on characterizationof debt or equityForeign legal characterizationSubstance requirementsInterest chargedPerspective of a French borrowerPerspective of a French lenderDebt waivers by a parent company to its subsidiaryGuarantee feesShould the guarantee be remunerated?Determination of an arm’s length remuneration forthe guaranteesWithholding tax issuesCash poolingInterest paid under cash-pooling arrangementsDeductibility of interest paymentsWithholding tax on interest paymentsInterest received under cash poolingRemuneration of the cash-pooling entityAllocation of cash-pool benefitTransfer of the cash-pooling activityFactoringLeasingOther forms of financing and credit riskarrangementsSectorsOil and gas industryFinancing Germany241Corporate income tax frameworkCorporate income tax systemTaxable entitiesTaxable incomeTax 6237237237238

Table of 7.8.2.7.8.3.7.9.7.10.Tax ratesInteraction of thin capitalization and transfer pricinglegislationIntercompany loansLoan or equityProfit participating loans (PPLs)Interest chargedTransfer pricing methodsCase studyGuarantee feesA parent guaranteeing the debt of a wholly ownedgroup company that is unable on a stand-alone basisto borrow the debt funding it needsA parent or offshore associate provides debt fundingto a group company that has the financial strength tobe able to borrow the debt funding it needs withoutsupport from its parent companyA parent company funding a subsidiary unable toborrow the funds it needs on a stand-alone basisA parent company provides a guarantee to asubsidiary that is able to borrow the funds it needson a stand-alone basis, to allow the subsidiary toaccess funding at the lower cost available to theparentTransfer pricing methodsUse of range of resultsCash poolingInterestRemuneration CPLAllocation of cash pool benefitDocumentationAdvance pricing agreements (APA)FactoringLeasingOther forms of financing and credit riskarrangementsSpecific industriesOil and gas industryFinancing 8259259260261262266266267267267268268268