Transfer pricing perspectives: Winds of Change - PwC

Conceptualising the challengeIntra‐group financial transactions,including related party loans, guarantees,cash pooling and other forms of financing,are increasingly receiving close attentionfrom tax authorities around the world.There are four major reasons for thisincreased focus:• The pricing of financing arrangementsis complex and has been exacerbated bythe financial crisis• The amounts at stake can be significant• There has been limited guidancefrom the Organisation of EconomicCooperation and Development(“OECD”), which has requiredtaxpayers and local tax authorities tointerpret best how the arm’s-lengthprinciple should be applied, often withdiffering outcomes• These issues are being tested in thecourts and recent decisions haverequired taxpayers to consider theimpact of passive association whenpricing financial transactions atarm’s length.The onset of the financial crisis in 2007resulted in a reduction in liquidity, a spikein both short-term and long-term fundingcosts, an increased requirement for parentcompanies to provide subsidiaries withguarantees in order to access third partybank funding, and increased corporatebond issuance to replace traditional bankfunding. Changes in the availability,structure and cost of funding at bothan industry-wide and group level hasimplications for internal financingarrangements for all types of MNCs. Thesearrangements are further complicated bythe extent to which MNCs have branchand/or subsidiary structures, as tax rules inmany countries often discriminate betweenthese two forms when applying thincapitalisation rules and the arm’s-lengthprinciple to pricing financial transactions.This type of concern and the lack ofOECD guidance are increasing tax risk formost multinational groups in this area oftransfer pricing.At the same time, the regulatorylandscape has continued to evolve withincreasing reporting and documentationrequirements, stricter penalty and interestregimes as well as a higher visibility oftransfer pricing to management throughreserves for uncertain tax positions andlosses incurred during the financial crisis.Thin capitalisation and fundingtransactions: approachesacross AsiaIn most jurisdictions, tax authoritiesfocus both on the pricing of related partydebt as well as whether the quantum ofthe debt complies with the arm’s-lengthprinciple. This second test is known asthin capitalisation and it is utilised bytax authorities to limit tax deductions onexcessive levels of debt. Often, there aredifferent rules (normally more beneficial)for the amount of debt a financialinstitution is able to hold compared tocompanies operating in the non‐FS sector.Transfer Pricing Perspectives. October 201165