The Organisation for Economic Co-operation and Development (OECD)’s Transfer Pricing (TP) Guidance on Financial Transactions released earlier this year has thrust intercompany financial transactions and loans back into the spotlight. In this guidance, OECD emphasised that, besides interest rates, all terms and conditions of the financing transactions (including the volume of debt) should be tested against the arm’s length principle.
“Intercompany financial transactions are generally regarded as high-risk transactions by tax authorities. On the income side, tax authorities are concerned that excessive interest income may be allocated to jurisdictions with low (or no) tax, while on the expense side, excessive interest expense deduction may be claimed,” shared Adriana Calderon, Director, Transfer Pricing Solutions Asia, at a recent webinar organised by the Singapore Chartered Tax Professionals.
“OECD’s latest TP guidance makes it clear that the days where a contract with little or no substance is sufficient (in supporting an intercompany financial transaction) is a thing of the past.”