KPMG report: Transfer pricing of financial transactions

Important steps in planning and undertaking intercompany financial transactions, particularly in the area of transfer pricing

Important steps in planning and undertaking intercompany financial transactions

Multinational corporations routinely engage in intercompany financial transactions to operate their global businesses. These transactions may include loans to fund a capital investment or acquisition, short-term working capital loans, factoring to free up cash at a subsidiary, and cash pooling to maximize the group’s use of internal cash and minimize external interest expense. Financial transactions are primarily contractual obligations and often less subjective compared with other areas of transfer pricing. In addition, unlike many other areas of transfer pricing, extensive reliable market data exist for determining the arm’s-length price, or interest rate, for most financial transactions.

However, many tax authorities have concerns, whether justifiable or not, that it is relatively straightforward for taxpayers to use intercompany financial transactions to shift profits and reduce their tax burden with no underlying business rationale—such as by manipulating contractual terms by adding loan terms, like the ability to prepay the loan or defer cash interest, that increase the interest rate. There is also concern about taxpayers characterizing as debt what might be more accurately characterized as equity, to generate deductions or avoid dividend withholding taxes on repatriation of income. Tax authorities have manifested these concerns through aggressive enforcement actions.

Read a November 2023 report* [PDF 329 KB] prepared by KPMG LLP tax professionals that provides practical tips for navigating challenges when structuring and pricing intercompany financial transactions.

* This article originally appeared in Tax Notes International (13 November 2023) and is provided with permission.




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