Intercompany financial transactions have gone from background noise to prime-time scrutiny in transfer pricing. Evolving OECD guidance, landmark court cases, and rising regulatory expectations mean these transactions can no longer fly under the radar.
In a recent Tax Thursday webinar, Exactera’s transfer pricing experts shared their knowledge on managing these financial arrangements without tripping up on compliance:
Show Me the Money: What Counts as a Financial Transaction?
Financial transactions aren’t your everyday operational dealings. They affect a company’s capital structure and fall under the arm’s length principle. They include intercompany loans, cash pooling, financial guarantees, captive insurance, and hedging. While these may seem routine, mishandling them can invite serious transfer pricing headaches.
Cash Is King: Why Financial Transactions Matter
Intercompany financing is more than moving money around. It funds growth, optimizes capital efficiency, manages liquidity, and lowers financing costs. But these perks also make financial arrangements a favorite target for regulators.
The OECD’s BEPS initiatives and Chapter 10 of the Transfer Pricing Guidelines (2020) have raised the stakes. Authorities now expect commercial rationale and economic reality, not just paperwork. Even with changes in IRS enforcement, experts like Exactera COO Mimi Song—recently featured in Reuters on transfer pricing enforcement—stress that proactive compliance, substance over form and careful documentation remain essential.
Chapter 10: Raising the Bar, One Loan at a Time
Before 2020, guidance was fragmented. Chapter 10 brought consistency, emphasizing substance over form and requiring agreements to match actual behavior. Economic context—borrower creditworthiness, collateral, and market conditions must also be considered.
While the CUP method remains preferred when comparables exist, alternatives like the yield method or cost of funds are now viable. The key is showing a defensible business purpose, not just numbers on a spreadsheet.
Lessons from the Real World: Cases That Speak Volumes
Recent court cases illustrate the risks of ignoring substance:
- Nortreco España: Over €30 million in interest deductions denied because loans lacked real substance.
- Singapore Telecom: $5 billion related-party loan challenged due to borrower capacity issues.
- BlackRock HoldCo: A $4 billion loan questioned for lacking commercial purpose, proving even arm’s length rates aren’t foolproof.
- Even globally recognized companies like Coca-Cola have faced scrutiny over intercompany financing arrangements, showing that no entity is too big to be tested.
The message is clear: authorities now check whether the commercial story matches the legal form.
Risky Business: Spotting Red Flags
Companies should watch for transactions that lack substance, have unjustified rates, or don’t reflect actual conduct. Over-reliance on benchmarking without functional analysis or structures designed mainly for tax advantages can raise alarm bells.
How to Stay Defensible:
- Document early and thoroughly: Align financial arrangements with commercial reality.
- Analyze function and risk: Consider both lender and borrower roles.
- Benchmark thoughtfully: Factor in terms, collateral, and currency.
- Think global: Consistency across jurisdictions is key.
- Build the narrative: Numbers alone aren’t enough. You must tell the commercial and economic story.
Key Takeaway: Make Your Money Make Sense
Financial transactions are no longer just technical details. Companies that align with Chapter 10 guidance, document clearly, and articulate a business rationale will be better prepared for audits and disputes.
For a deeper dive, including examples and use cases, watch the full on-demand webinar.
Want to learn more? Our team is available to walk you through it. Schedule a quick chat.
