Transfer Pricing Forum Transfer Pricing for the International Practitioner

The Arm’s Length Nature of Intercompany Financing Transactions The Arm’s Length Nature of Intercompany Financing Transactions The OECD’s recent publication Discussion Draft on Financial Transactions addresses the Report on Actions 8-10 of the BEPS Action Plan, which includes transfer pricing guidance for related party financial transac- tions. The goal of this forum is to identify the current status of the country’s specific rules, best practices, and court cases applicable to de- termining and supporting the arm’s length nature of intercompany fi- nancing transactions (including the terms of the instrument and the pricing of the transaction) and the potential impact of the discussion draft. 1. How does your country identify and adjust related party financing transactions? What is you country’s approach to determining whether the debt arising from a related party financing transaction should be properly characterized as debt? 2. What rules or guidance exist in your country to determine the arm’s length interest rate for a related party financing transaction?

Volume 9, Issue 3 OCTOBER 2018 www.bna.com 3. Besides the determination of whether a transaction’s interest rate is at arm’s length, what other factors does your country consider in deciding whether the related party financing THE TRANSFER PRICING is arm’s length and acceptable overall? Examples of additional factors may include: con- FORUM is designed to present a tractual terms, functions of the companies involved, characteristics of the companies’ fi- comparative study of typical transfer pricing issues by Country Panelists nancial products or services, economic circumstances, or business strategies. who are distinguished transfer 4. If it is determined that any part of a related party transaction should not be characterized pricing practitioners in major and as debt, what are the consequences to both the borrower and the related lender? emerging industrial countries.Their 5. Are there any relevant court cases or tax rulings in your country dealing with the transfer discussions focus on practical pricing of intercompany financing transactions? questions posed by guidance, case law and practice in their respective jurisdiction, with practical recommendations whenever appropriate.

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Editors Tiwa A Nwogu Peter H. Rho Bloomberg Tax United States

2 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Lion Orlitzky & Co. – Moore Stephens Contents Israel 40 Italy TOPIC Marco Valdonio, Aurelio Massimiano, and Mirko Severi The Arm’s Length Nature of 1 Maisto e Associati, Milan Intercompany Financing Transactions 45 Japan RESPONSES Takuma Mimura Cosmos International Management Co., 4 Argentina Ltd, Nagoya Cristian E. Rosso Rosso Alba, Francia & Asociados, 48 Korea Buenos Aires Dr. Tae Hyung Kim and Seong Kwon Song 7 Austria Deloitte Korea Alexandra Dolezel BDO Austria GmbH, Vienna 50 Luxembourg Peter Moons, Gaspar Lopes Dias, and 9 Belgium Fernanda Rubim Dirk Van Stappen, Yves de Groote, Loyens & Loeff, Luxembourg and Romane Moniotte KPMG, Antwerp/Brussels 53 Mexico Moises Curiel Garcia, Allan Pasalagua, 13 Brazil and Rafael de la Mora Jerry Levers de Abreu, Lucas de Lima Baker & McKenzie, Mexico City Carvalho, and Mateus Tiagor Campos TozziniFreire Advogados, Sao Paolo 55 The Netherlands Krzysztof 4ukosz, Olga Shambaleva, 17 Canada Martin Druga, and Etan Wijnberg Richard Garland and Inna Golodniuk Ernst & Young Belastingadviseurs LLP, Deloitte LLP, Toronto Amsterdam 20 Denmark 58 New Zealand Arne Mollin Ottosen and Casper Leslie Prescott-Haar and Sophie Day Jensen TP EQuilibrium | AustralAsia LP Kromann Reumert, Copenhagen 61 Portugal 22 France Patrı´cia Matos and Sofia Margarida Julien Monsenego, Thibaud Jorge Boucharlat, and Guillaume Deloitte, Lisbon Madelpuech Gowling WLG; NERA Economic 64 Russia Consulting, Paris Evgenia Veter, Stepan Kalyuzhnyy, and Yuriy Mikhailov 26 Germany Ernst & Young, Moscow Dr. Alexander Voegele, Philip de Homont, and Georg Dettmann 68 United Kingdom NERA Economic Consulting, Frankfurt Murray Clayson and Cora Hardy; Andrew Cousins 28 Hong Kong Freshfields Bruckhaus Deringer LLP, Jeffrey Wong and Irene Lee London; Duff & Phelps LLP, London KPMG, Hong Kong 75 United States 30 India Michelle Johnson, Stefanie Perrella, Rahul K. Mitra, Aditya Hans, Ashish Michael Berbari, and Zachary Held Jain, Sourav Toshniwal, and Meera Duff & Phelps LLP Kohli Dhruva Advisors LLP, India 79 Transfer Pricing Forum Editorial Board and Country Panelists 36 Ireland Catherine O’Meara 88 Transfer Pricing Forum Country Matheson, Dublin Contributors 38 Israel Yariv Ben-Dov

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 3 Argentina Cristian E. Rosso Alba Rosso Alba, Francia & Asociados

1. How does your country identify ditions. According to the recently passed tax and adjust related party financing reform, an interest expense from related party loans that exceeds 30% of the debtor’s net taxable income transactions? What is you country’s before deducting interest, amortization, and taxes approach to determining whether may not be deducted. the debt arising from a related party 4. Generally, while performing obligations over time, financing transaction should be if the conduct of the related parties is only consis- properly characterized as debt? tent with that of a shareholder, rather than a lender.

Despite the lack of statutory methods specifically fo- In all cases, an interest expense that is to be de- cused on evaluating and adjusting related party fi- ducted should be scrutinized under both norms: it nancing transactions, the Argentina Income Tax law should not exceed either the thin-cap threshold or the (‘‘ITL’’) does provide for the traditional transfer pric- arm´ s length consideration for both the interest rate ing methods suggested by the OECD transfer pricing and any guarantee fee. If an affiliated borrower lo- guidelines. ITL further stresses the need to comply cated in Argentina receives an interest-free loan from with the best method rule. In many instances, this re- a related party abroad, the ARS is more likely to con- sults in the so-called traditional transactional meth- sider it equity than debt and therefore disallow the ods being favored over the profit methods. foreign exchange deduction. The current lack of tax inflationary adjustment creates a pitfall, which pro- In practice, given the nature of financial transac- motes such tax adjustments by the ARS. tions, the Comparable Uncontrolled Price (‘‘CUP’’) — or the Comparable Uncontrolled Transaction (‘‘CUT’’)1 — method is usually considered the most ap- 2. What rules or guidance exist in propriate method for intercompany loans in Argen- your country to determine the arm’s tina. It is the method most widely applied by the length interest rate for a related Argentine Revenue Service (‘‘ARS’’) during tax audits party financing transaction? and assessments. For a related party financing transaction to be prop- Despite the lack of specific rules for adjusting financ- erly characterized as debt, the starting point is proper ing transactions, practitioner’s standards light up the documentation, which should carefully delineate the response. In the absence of internal comparables at actual agreement between the related parties. Debt-to- the tested party level, the CUP method first requires equity re-characterizations of transactions between taking into account the characteristics of the affiliates based on the failure to comply with the arm´s borrower´s market — namely, the location where the length standards have been common, leading the ARS risk resides — to benchmark an interest rate. Under to challenge the deduction of interest expenses and this point of view, for inbound transactions, domestic foreign exchange losses at the Argentine debtor level. interest rates should be considered (e.g., domestic in- In fact, regarding financial transactions between af- terest rates and standards published by the Argentine filiates, the ARS has indicated that a re- Central Bank, among others). characterization of debt-to-equity should be made if: For a loan received by a legal entity located in Ar- 1. There is no written agreement between the affiliates gentina, the interest rate to be used as a comparable that properly evidences the transaction dates, for transfer pricing purposes should consider the bor- terms, and conditions. rower’s funding costs, thus focusing the search on 2. The terms are not in line with industry practice, or comparable rates in the Argentine market. the parties have not properly performed the con- Secondly, the analysis should focus on interest rates tractual obligations undertaken, for example, if the for loans to companies in the same currency in which creditor has not enforced the agreement in cases of they were granted (e.g., US Dollars). Considering the failure to make payments or has not charged inter- information available from the Argentine financial est after maturity, etc. market, a possible alternative for a relatively conven- 3. The amounts lent are not commensurate with the tional analysis would consist of comparing the agreed debt-to-equity ratio of a debtor in arm’s length con- rate between the Argentine entity and its related com-

4 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 pany abroad with the interest rates generally used for dollar- tractual terms are a primary factor to determine the arm´s denominated loans. length pricing of the transactions. The agreement should match The Argentine Central Bank (‘‘BCRA’’) provides active interest the economic substance of the related party transaction; other- rates in US Dollars under its norm in credit policy ‘‘A’’ 6031, wise, the ARS may delineate the financing differently to ensure which covers the following transactions: that substance takes precedence over form. q Pre-financing and financing of exports; Other factors that should be taken into account are the fol- q Other financing to exporters, with a future flow of foreign lowing: currency income; q The debt-to-equity ratio of the borrower, to determine the q Financing to producers of goods to be exported; rate an unrelated lender would have been willing to charge to q Financing to suppliers of goods or services that are part of an unrelated borrower in comparable circumstances. the production process of exportable goods in foreign cur- q The credit rating of the borrowing company. rency; q q Financing investment projects, working capital, or the ac- Amount, issue date, currency, maturity, and associated quisition of all kinds of goods, which increase or are linked to hedge risks. the production of goods for export; q Relevant economic circumstances, such as the locations of q Financing to commercial clients treated as credits for con- the borrower and lender, local regulations, business industry sumption or housing and destined for the importation of of the borrower, timing of the transaction, and macroeco- capital goods; nomic trends that may alter reference rates or affect prices q Debt securities or certificates of participation in financial (inflation rate, volatility of exchange rate, growth rate, etc.). trusts; q Type of interest rate: fixed or floating. q Inter-financial loans; q Existence of guarantees, either implicit or explicit, and cross q Letters and notes of the BCRA in US Dollars; guarantees or any other kind of collateral. q Direct investments abroad by companies residing in the q Subordination clauses, which are a negative feature for the country; ARS, since subordination generally is strong evidence that the q Financing of investment projects, including working capital, related party advance resembles equity rather than a loan be- that allow for the increase in production in the energy sector cause it indicates that the related party shares more in the and have sales contracts or guarantees or total guarantees in risks of the venture. foreign currency; q Primary subscription of foreign currency debt instruments q Economic rationale and purpose of the financing. of the National Treasury, up to the amount equivalent to one q Debtor’s capability to perform the decision-making func- third of the total applications made in accordance with the set tions in order to control the risk associated with undertaking provisions; and the financing. q Financing of investment projects for cattle, including work- q Bank opinions or other relevant comparable uncontrolled ing capital, without exceeding 5% of the entity’s foreign cur- transactions that may light up the terms under which a com- rency deposits. pany could borrow funds under arm’s length terms and con- Using the US Dollar rates published by the BCRA for the ac- ditions. tivities described by the ‘‘A’’ credit policy 6031 is a valid starting point in analyzing whether those rates could be considered 4. If it is determined that any part of a comparable to the transaction under analysis (i.e., in view of the standards of ITL Article 21.2). Considering the specific related party transaction should not be characteristics of the rates mentioned above, if they are not characterized as debt, what are the comparable to the tested transaction, then a local interest rate consequences to both the borrower and denominated in AR$ (Argentine Peso) is used and later con- the related lender? verted to the corresponding currency. On the other hand, for outbound transactions, ARS inspec- Intragroup financing is usually scrutinized deeply by the ARS tors commonly use foreign data sources, including interest to determine whether the terms and conditions comply with rates in the borrower’s market. the arm’s length standard. In many cases, interest-expense de- ductions are challenged by the ARS because either the interest 3. Besides the determination of whether a rate is too low (thus resembling a capital contribution from a related party) or, conversely, the interest rate is too high (thus transaction’s interest rate is at arm’s involving a disguised, non-deductible dividend distribution). length, what other factors does your Over the last ten years or so, in the absence of a tax inflation- country consider in deciding whether the ary adjustment, the ARS auditing trend has been to character- related party financing is arm’s length ize related party debt as equity, thus preventing the Argentine and acceptable overall? Examples of affiliated borrower from deducting substantial foreign ex- additional factors may include: change losses (i.e., vis-a`-vis a major annual devaluation of the contractual terms, functions of the local currency) and interest expenses. It is worth noting that in the case of cross-border financing denominated in foreign cur- companies involved, characteristics of the rency, the inflationary adjustment results in an income tax gain companies’ financial products or services, in Argentine Pesos from an accounting perspective. If such an economic circumstances, or business adjustment were actually allowed, it would normally offset the strategies. foreign exchange losses over time. This offsetting has not oc- curred so far because inflationary adjustment has not worked, As previously mentioned, since the written agreement between creating a revenue incentive for the ARS to promote debt-to- the related parties is a material starting point, embedded con- equity characterizations.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 5 5. Are there any relevant court cases or tax that should be properly pondered by the Court for an appropri- 2 rulings in your country dealing with the ate solution to the controversy. transfer pricing of intercompany financing Cristian E. Rosso Alba is Partner in Charge of the tax practice at Rosso transactions? Alba, Francia & Asociados in Buenos Aires, Argentina. He may be contacted at: There have not been any controversies regarding the proper [email protected] pricing of intercompany financing transactions.. However, for www.rafyalaw.com the reasons stated in our response to Question 4, above, there are many cases in which the ARS has re-characterized cross- border, related party loans as equity. NOTES After approximately ten years of litigation, the leading case 1 Argentine regulations do not specifically distinguish between the will soon be decided by the Federal Supreme Court. So far, the Comparable Uncontrolled Price (CUP) and Comparable Uncon- decision of the Attorney General has been to sustain the taxpay- trolled Transaction (CUT) methods, but analysts identify the CUP er’s criteria as to the existence of actual debt, rather than equity, as the method used to validate the sale of goods and the CUT as the an outcome that should not be impaired by the lack of timely method to validate the provision of services. repayment of principal and interest. In recommending such a 2 As far as public information is concerned, see the Attorney Gen- decision to the Federal Supreme Court, the Attorney General eral Dictamen CAF 30109/2014/3/RH in the case Transportadora de noted that the taxpayer’s economic performance was compro- Energı´a S.A, c/ Direccio´n General Impositiva s/recurso directo ex- mised by governmental action, which is a substantial factor terno.

6 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Austria Alexandra Dolezel BDO Austria GmbH

1. How does your country identify 2. What rules or guidance exist in and adjust related party financing your country to determine the arm’s transactions? What is your country’s length interest rate for a related approach to determining whether party financing transaction? the debt arising from a related party Under Austrian law, no specific rules exist regarding financing transaction should be the determination of the arm´ s length interest rate for properly characterized as debt? related party financing transactions, besides the gen- eral arm´ s length principle under § 6 item 6 of the Aus- Generally speaking, Austria closely follows the OECD trian Income Tax Act. The Austrian high courts have Transfer Pricing Guidelines. Amendments that are not yet issued specific decisions regarding the transfer made to the guidelines are generally applied retroac- pricing of interest rates. Under a decision dating back tively by the Austrian tax authorities, provided they to 1990 (18.12.1990, 89/14/0133), the Austrian High serve as a better means of interpreting the arm’s Court stated that the use of bank interest rates for pur- length principle (incorporated under the Austrian law poses of supporting the arm´ s length nature of inter- only on a general basis). The 2011 version of the Aus- company interest rates seems adequate. Similarly, it trian Transfer Pricing Guidelines make references to stated in a decision from 1989 (30.5.1989, 88/14/0111) the OECD guidelines, which are interpreted in a so- that interest rates of bonds might serve as a reference. called dynamic way by the tax authorities (a way that However, the court stated that there is not a single ac- is criticized by some tax experts), meaning that refer- ceptable arm´ s length price, so insignificant deviations ences are also made to updates to the OECD Transfer from a reference value do not justify corrections. Pricing Guidelines. These Austrian Transfer Pricing There is a decision from a court of first instance re- Guidelines, as issued by the Austrian Ministry of Fi- garding the pricing of cash pools (focusing on the ap- nance, are normative to the tax authorities (to the propriate term for the funding if funds are not left for extent they do not contradict the law) but not to the a short term in the pool). taxpayer. The guidelines provide a good indication of The Austrian Transfer Pricing Guidelines 2011 the position the tax authorities are likely to take (which will be amended over the next months to con- during a tax audit. Therefore, a correct delineation of sider OECD developments since 2011) deal with the the financial transactions between related parties in determination of intercompany interest rates in items line with relevant statements in the OECD Transfer 87–91, and they mainly refer to the OECD Transfer Pricing Guidelines is viewed as necessary by the Aus- Pricing Guidelines, which favor the Comparable Un- trian tax authorities. controlled Price (CUP) Method. No details are given Austrian law (§ 8 of the Austrian Income Tax Act, as to the application of the method. It is specifically § 21 of the Austrian Federal Fiscal Code) and the re- stated that financing by banks is not directly compa- lated jurisdiction of the Austrian high courts provide rable due to differences in business strategy, cost that the classification of the granting of funds between structure, and diversification. Interest rates charged related parties as debt or equity, from a tax point of by banks may thus only represent an upper limit of an view, is subject to analysis. An analysis of the underly- arm´ s length interest, with the limit even further 1 ing contract may serve as the first indication of capped by the secured interest charged by banks. whether the transaction was conducted at arm’s Lending interest rates may be relevant if the creditor length. disposes of its own excess liquidity. Detailed func- tional and risk analyses of both the borrower and In the past, certain rules of thumb (such as debt-to- lender are required. In practice, references are mostly equity ratios) had been applied in this context. Today, made to publicly available information on bond rates. the tax authorities instead analyze the creditworthi- Here, the determination of the borrower’s creditwor- ness of a related party borrower by applying a set of fi- thiness is one of the most critical elements in deter- nancial factors (such as the capability to repay the mining the arm´ s length rates (determination of any debt based on reimbursement schedules). effects of implicit support).

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 7 3. Besides the determination of whether a 4. If it is determined that any part of a transaction’s interest rate is at arm’s related party transaction should not be length, what other factors does your characterized as debt, what are the country consider in deciding whether the consequences to both the borrower and related party financing is arm’s length the related lender? and acceptable overall? Examples of In the event a shareholder’s granting of funds is reclassified as additional factors may include: equity, any interest payments are not tax deductible to the bor- contractual terms, functions of the rower. For the lender, acquisition costs in the shareholding would have to be increased by the amount of funds granted, fol- companies involved, characteristics of the lowed by a proper valuation of the participation at year-end. companies’ financial products or services, Further, dividend withholding tax could be triggered if there is economic circumstances, or business deemed willful behavior, as evident in cases of constructive dividends. strategies. Under local laws, a tax exemption at source for any such divi- dend withholding tax would not be applicable (even if the gen- As discussed above, generally speaking, Austria closely follows eral requirements are met, i.e., shareholding of at least 10% and the OECD Transfer Pricing Guidelines when deciding whether uninterrupted participation of at least one year), but a refund the related party financing is arm’s length and acceptable over- procedure would instead be applicable. If a subsidiary grants a all. Determining whether funds between related parties should loan to a shareholder in financial trouble, the granting of the be classified as debt or equity is subject to analysis, as provided loan itself might be classified as a constructive dividend pay- by Austrian law (§ 8 of the Austrian Income Tax Act, § 21 of the ment. Austrian Federal Fiscal Code) and the related jurisdiction of the Austrian high courts. Therefore, the underlying contract be- 5. Are there any relevant court cases or tax tween the parties may be subject to analysis and serve as the rulings in your country dealing with the first indication as to whether the classification was made on an transfer pricing of intercompany financing economic basis. transactions? In the past, standard rules, such as debt-to-equity ratios, had As discussed above, there are court cases that highlight the tax to be used by the tax authorities in determining arm’s length. authorities’ approach to related party transactions. For ex- Nowadays, however, the authorities prefer to analyze the cred- ample, in decisions dating back to 1989 and 1990, the Austrian itworthiness of a related party borrower by applying a set of fi- High Court stated that the use of bank interests and bond inter- nancial factors. est rates are adequate for supporting the arm’s length nature of intercompany interest rates. (30.5.1989, 88/14/0111; From a tax perspective, the scrutiny with which tax authori- 18.12.1990, 89/14/0133). Another case, UFS Feldkirch of June ties approach related party transactions is underscored in some 13, 2012, RV/0165-F/09, shows the Austrian tax authorities’ ap- of the court decisions in Austria. For example, UFS Feldkirch of proach to related party transactions, which is to focus on finan- June 13, 2012, RV/0165-F/09 highlights the tax authorities’ ap- cial factors. proach to related party transactions. Alexandra Dolezel is a Tax Director at BDO in Vienna. Further, tax authorities are more closely analyzing whether She may be contacted at: financing in a given form makes sense from an economical [email protected] www.bdo.at standpoint (e.g., whether a diligent businessman would have taken out a loan when he could have refinanced the company using the cash pool). Thus, both the business strategies and the NOTES arm´ s length principle of a company are increasingly being 1 See the decision of the German High Court of December 21, 1994, tested. I R 65/94.

8 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Belgium Dirk Van Stappen, Yves de Groote, and Romane Moniotte KPMG Belgium

1. How does your country identify stand-alone financial statements of the Belgian entity and adjust related party financing concerned for the preceding financial year: transactions? What is you country’s q A sum of operational and financial income of EUR 50 million; approach to determining whether q A balance sheet total of EUR 1 billion; and the debt arising from a related party q An annual average of 100 full-time equivalents. financing transaction should be As intercompany financing transactions have properly characterized as debt? become a clear focus area in Belgium over the last few Identification of intercompany financing transac- years during transfer pricing audits as mentioned tion above, it is not surprising that Belgian tax authorities have introduced reporting requirements on intercom- Annual accounts and transfer pricing audits pany transactions, both in the Master File Form and In the past, Belgian tax authorities used to identify the Local File Form. While the Master File Form re- intercompany financing transactions through the quires a general description of the group’s intercom- annual accounts filed each year with the Belgian Na- pany financial activities, the Local File Form requires tional Bank by the Belgian companies. In particular, a detailed reporting of the intercompany financing one section of these annual accounts is dedicated to transactions entered into by the Belgian entities, in- relations with associated enterprises. However, this cluding the reporting, for the accounting year consid- section is rather limited and do not provide the Bel- ered, of the following intercompany financing gian tax authorities with sufficient indications with payments and transactions: respect to the volume and type of the intercompany fi- q Interest on loans; nancing transactions. q Opening position, end position and fluctuations Based on financial information available in those during the accounting year of the loans; annual accounts and through specific data mining q Interest on cash pooling; tools, Belgian tax authorities would then initiate q transfer pricing audits. Over the past years, we ob- Opening position, end position during the account- served that Belgian tax authorities tend to increase ing year of the cash pooling; their focus on intercompany financing transactions in q Interests on trade receivables and payables; the conduction of their transfer pricing audits, and in q Opening position, end position, and fluctuations particular, on cash pooling arrangements, negative in- during the accounting year of the trade receivables terest spread, early repayment clause, credit rating and payables; analysis and guarantee fees. q Guarantee fees; Transfer pricing documentation requirements q In-house (re)insurance premiums; and In line with the guidance provided by the OECD in q Derivatives. Action 13 of its Base Erosion and Profit Shifting In addition, the taxpayer will have to mention, for (BEPS) Action Plan, Belgium has introduced transfer each financing transaction, whether he can support pricing requirements through the Program Law of the arm’s length nature of the prices applied by a July 2016 and the related Royal Decree dated October transfer pricing documentation. 28, 2016. Those new requirements, applicable to ac- Consequently, these forms, and in particular the counting years starting on or after January 1, 2016, Local File Form, will make intercompany financing consist of three layers of documentation: transactions and fluctuations even more transparent q Country-by-Country Reporting and visible than in the past, where transfer pricing q Master File Form documentation was only required upon request by the q Local File Form Belgian tax authorities in case of a tax audit. As these new documentation requirements will provide the A Master File Form and Local File Form should be Belgian tax authorities in general and the transfer prepared and filed by each Belgian company or per- pricing audit teams in particular with information manent establishment that exceeds one of the follow- that will allow them to identify and select companies ing thresholds, to be assessed on the basis of the where adjustments are likely to be high, it is likely that

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 9 we will observe an increase in the number of transfer pricing Future regulation audits in Belgium. Following the implementation of the EU-anti tax avoidance However, it still remains uncertain how the Belgian tax au- directives (ATAD I and II) into Belgian law, the deduction of the thorities deal with this significant inflow of new (financial) data net interest incurred on loans concluded as of June 17, 2016 available in the transfer pricing forms. will be limited to the highest of either EUR 3 million or 30% of Adjustments of intercompany financing transaction EBITDA (earnings before interest, tax, depreciation and amor- Generally speaking, the Belgian Tax authorities may adjust tization). The net interest which cannot be deducted because of related party financing transactions if, during an audit, they this limit can be transferred to the following years without any find that the transaction does not respect the arm’s length prin- time limitation. A deferred tax asset will have to be set up for ciple as defined in Article 9 of the OECD Model Tax Convention, the interest expenses that can be carried forward and deducted which typically arises when the Belgian Tax authorities deter- from future taxable income. Companies will also have the pos- mine that independent parties would not have been willing to sibility to transfer the exceeding interest capacity they may enter into an agreement with similar terms and conditions. As have, based on a convention between them. further explained under point 4, adjustments could consist in: This new limitation rule, substituting to the thin capitaliza- q Denying tax deduction of the excess interests paid; or tion rule, will be effective as from assessment year 2021. As q Imposing a minimum taxable basis. from that date, the existing thin capitalization rule mentioned above will continue to apply for loans granted by companies lo- The interests on loans will be considered as debt by the Bel- cated in tax havens and for loans concluded before June 17, gian tax authorities, and will therefore be tax deductible as pro- 2016 to the extent that the loan terms have not substantially fessional expenses, as long as (1) the interest rate applied on the changed since then, although the tax payer could voluntary loans do not exceed the market interest rate and (2) the thin decide to switch to the new interest limitation system. capitalization rule is met, which are further described below. Moreover, the Belgian tax authorities could disregard the inter- ests paid as debt by demonstrating that such financing struc- 2. What rules or guidance exist in your ture has been set up in order to abuse the law (cf. Article 344, country to determine the arm’s length Belgian Income Tax Code ‘‘BITC’’). interest rate for a related party financing (1) Market interest rate transaction? In assessing whether the interests paid do not exceed the market interest rate, one has to take into account additional There are no specific rules imposed by the Belgian tax authori- specific characteristics of the borrower (e.g., business risk and ties with respect to the determination of the arm’s length inter- financial risk) and of the intercompany financing transaction est rate to be applied for a related party financing transaction. itself (e.g., duration) (cf. Article 55, BITC). This condition does Generally, we observe that Belgian tax authorities strongly not apply to, among others, interests paid to Belgian banks or follow in their approach OECD’s guidance, as well as interna- financial institutions and Belgian branches of foreign banks or tional case laws and reports from credit ratings agencies such financial institutions, or to interest paid on publicly issued as Moody’s and Standard & Poor’s. bonds (cf. Article 56, BITC). Note however that the Belgian tax authorities are currently As observed during tax audits, the Belgian tax authorities will finalizing a new transfer pricing circular which might include also consider other factors in order to determine whether the further guidance in this respect. The draft circular will be interest rate is in line with the market interest rate, that is, issued for consultation before year-end, and is expected to be fi- whether it can be regarded as at arm’s length (see also point 2). nalized early next year. (2) Thin capitalization rule OECD guidance As per the thin capitalization rule, the total amount of loans While different methods can be used in order to determine granted should not exceed five times the sum of the taxable re- the arm’s length interest rate for a related party financing trans- serves (at the beginning of the taxable period) and the paid-in action, the Belgian tax authorities, in line with the OECD’s capital (at the end of the same taxable period) (cf. Article 198, guidance, tend to prefer the applicability of the Comparable BITC). The loans to be considered for the evaluation of the 5:1 Uncontrolled Price Method (‘‘CUP’’). In particular, the arm’s- ratio are the loans granted by group members (as defined in Ar- length character analysis of a transaction should ideally be ticle 11 of the Belgian Company Code) as well as by lenders that based on the price or profit the taxpayer earns in comparable are not subject to income tax or that benefit from a substan- transactions with a third party, i.e., by reference to ‘‘internal tially more advantageous tax regime than the Belgian tax comparable’’. However, when this is not possible, the compari- regime. The rule therefore applies to all intercompany interest son may be made by reference to the price or profit that would payments, except if, among others, the loan is granted by a fi- have been earned in comparable transactions between inde- nance and credit institutions (cf. Article 56, § 2, 2° BITC). pendent enterprises (i.e., by reference to ‘‘external compa- Moreover, Belgian tax legislation does not systematically rable’’). consider, for the evaluation of the 5:1 ratio, the loans granted by For any transaction to be considered as reasonably compa- a third party that are backed up/guaranteed by a group rable uncontrolled transactions, one must be able to confirm member. This type of loans will only be taken into account in either: the evaluation of the threshold in case the main purpose of — that there are no differences between the uncontrolled and such guarantee is to evade taxes. controlled transactions which would materially affect the price In addition, it should be noted that cash pooling transactions in the open market; or are not specifically excluded from the scope of the thin capital- — if there are material differences that reliable adjustments ization rule. The amount of interests paid (or attributed) and can be made to eliminate the material effects of such differ- the amount received (or obtained) in relation to cash pooling ences. activities will be netted, as long as the company can prove that As stated in the OECD guidelines, the CUP method is the the interest payment is linked to cash pooling activities and most direct and reliable way to apply the arm’s-length principle that a framework contract has been concluded in that respect. and to determine the prices for the related-party transactions

10 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 when there are no material differences between controlled and methodology approaches based on the group credit rating uncontrolled transactions that would affect prices. As a conse- rather than on stand-alone credit rating. At the same time, the quence, the CUP is therefore preferred to all other methods. Belgian Ruling Commission still follows a more balanced With respect to intercompany financing transactions, two po- credit rating approach, often based on the S&P’s Group Credit tential applications of the CUP method could be used in the Rating Methodology guidance. Belgian context, the first being the direct application, and the Belgian case law and rulings second a derivative of the CUP method (hereinafter referred to Belgian case law is rather limited in relation to intercompany as the ‘‘build-up’’ method). financing in a transfer pricing context. Case law is mainly dis- (1) Direct CUP method cussing waiver of debt related issues, or notional interest de- Applied to financing transactions, the direct CUP method is duction structures. For the impact of implicit group support, the standard CUP method that evaluates the arm’s-length char- one is rather referring to international case law. acter of a controlled transaction by comparing the interest rate On the other hand, the Belgian Ruling Commission has pub- charged in the controlled transaction to the interest rate lished throughout the years an important number of rulings in charged in a comparable uncontrolled transaction. This relation to intercompany financing, given the important method may be used when data are available to establish the in- number of group treasury centers situated in Belgium. Rulings terest rate charged between unrelated parties under similar cir- are being published on a no-name basis, and can therefore be cumstances. consulted. The application of the CUP method requires a high degree of similarity of the loans in determining comparability between 3. Besides the determination of whether a the controlled and uncontrolled transactions. If there are no differences between the controlled and uncontrolled transac- transaction’s interest rate is at arm’s tions that would affect the interest rate, or only minor differ- length, what other factors does your ences for which appropriate adjustments can be made, then the country consider in deciding whether the CUP method will generally be the most direct and reliable mea- related party financing is arm’s length sure of an arm’s-length interest rate for the controlled transac- and acceptable overall? Examples of tion. When defining an arm’s-length interest rate for an intercom- additional factors may include: pany loan, the Belgian tax authorities would take into account contractual terms, functions of the the following characteristics of the loan, amongst others: companies involved, characteristics of the q Purpose of the loan; companies’ financial products or services, q Credit rating of the borrowing company; economic circumstances, or business q Amount; strategies. q Currency; q Maturity; In line with the OECD guidance, the Belgian tax authorities will q Issue date; mainly evaluate the following five factors when determining q Country of the borrower/ lender; whether the related party financing transaction is arm’s length: q Interest rate type (fixed or floating); q Contractual terms; q Collaterals (guaranteed or not); q Functions performed with emphasis on assets used and risks q Subordination level; assumed; q Fixed loan or loan facility; and q The characteristics of property transferred or services pro- q Early termination clauses. vided; (2) Indirect CUP method or ‘‘Build-up’’ method q The economic circumstances of the parties and of the The ‘‘Build-up’’ method can be seen as an indirect application market in which the parties operate; of the CUP method as it is subdividing an interest rate in differ- q The business strategies pursued by the parties. ent components, and is successively defining an arm’s length We observe that, with respect to intercompany financial rate/spread for each component identified based on market transaction, Belgian tax authorities tend to give significant im- comparables. portance to proper intercompany agreements which should Applying the ‘‘Build-up’’ method, one will add-up various identify the pricing methodology and the terms and conditions components to arrive to an interest rate that takes into account of the transaction. Indeed, those agreements often represents the various characteristics and specificities of the intercom- the only transfer pricing documentation available in relation to pany loan to be documented. the underlying intercompany financing transactions. In addi- The building blocks to be taken into account should – or tion, specific clauses such as maturity, subordination, convert- could – include the following: ibility, early repayment, etc. might have an important impact q A base (risk free) rate; on the applied transfer pricing and are therefore closely scruti- q A company risk premium; nized by the Belgian tax authorities. q A country risk premium; and Belgian Tax Authorities focus on intent, reasonableness and q Adjustments for unrated groups, liquidity differences com- economic realities of financial related party agreements, which pared to bonds, subordination, guarantees, etc. is essentially a focus on all the facts surrounding the financing Reports from credit rating agencies transaction. It is therefore important to have detailed intercom- Credit rating agencies such as Moody’s and S&P regularly pany agreements in place in relation to intercompany financial issue reports relating to the assessment of a group’s or sub- transactions, which demonstrates that each clause corresponds group’s creditworthiness, which will impact the company risk to what third parties would have agreed upon in comparable premium and therefore the interest rate. circumstances. Over the past few years, we have observed that the Belgian However, Belgian tax authorities would consider the eco- transfer pricing audit team tends to be more favorable to credit nomic substance of the transaction and do not rely solely on

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 11 what is written in the contract. If the agreement does not match having directors overcharging their management companies the economic realities of the parties involved, Belgian Tax Au- through high interest loans instead of increasing their salary. thorities may attempt to requalify the terms and conditions of the agreement or the pricing reflected therein. 5. Are there any relevant court cases or tax The inclusion of a subordination clause when no other debt has been contracted by the company might be questionable, es- rulings in your country dealing with the pecially in case there is no other external debt yet. transfer pricing of intercompany financing As a second example, consider a related party agreement in transactions? which a short term loan is renewed each year with a short term rate applied. Belgian Tax Authorities may try to requalify the As referred to above, given the significant number of treasury loan as a long term loan (if Belgium is the lender). They might centers located in Belgium, several rulings have been granted be able to demonstrate that, from the inception of the loan, par- by the Belgian Ruling Commission with respect to intercom- ties knew that the short term loan would be renewed annually. pany financing transactions. A majority of those deal with the However, as mentioned by the OECD, hindsight cannot be used arm’s length remuneration to be applied for intercompany in this respect. loans, cash pooling arrangements, guarantee fees, early repay- In addition, if an agreement contains an early termination ment clause, and transfers of loan portfolio. clause with no prepayment penalty, Belgian Tax Authorities In addition, Belgian tax authorities have taken positions with would expect the borrower to exercise the termination clause respect to the abuse of the notional interest deduction. The when market interest rates are significantly lower. In theory, main question in this respect is to know whether the capital Belgian Tax Authorities are not allowed to make opportunity granted by an intercompany loan could be taken into account management decisions, which makes it harder to requalify for the application of the notional interest deduction regime. term agreements. In practice, Belgian Tax Authorities evaluate Such a structure is not excluded as such in the application of the facts and circumstances of the agreement, and the eco- the notional interest deduction regime. However, in case the nomic realities to assess whether an adjustment is necessary. Belgian tax authorities can prove that the set-up of such an in- tragroup financing structure has only been driven by tax con- 4. If it is determined that any part of a siderations, they will reject the deductibility of the costs related party transaction should not be exposed, pursuant the provision of the anti-abuse rule stated in the BITC (cf. Article 344 BITC). Those costs would then also be characterized as debt, what are the considered as a minimal taxable base (cf. Art. 207 BITC). consequences to both the borrower and Other case law in relation to intercompany financing relates the related lender? to waiver of intercompany debt, i.e., circumstances where a re- lated party is not able to reimburse its intercompany loan. The Requalification of debt into equity is rather uncommon from a deductibility of the related loss at the level of the lender is being Belgian perspective, given the specific thin capitalization rules discussed, as well as the revival clauses included therein. in place (article 198, 11° of the Belgian Income Tax Code). Tax As observed, the Belgian court cases and tax rulings dealing authorities will therefore rather reject the related excess inter- with intercompany transactions are fact driven and must be est expenses, as opposed to requalifying the debt into equity. considered individually. The thin capitalization rules state that interest is only deduct- ible insofar as the intercompany debt does not exceed five times Dirk Van Stappen is a Partner at KPMG Belgium; Yves de Groote is a the taxable reserves in the beginning of the year and the capital Director at KPMG Belgium; and Romane Moniotte is a Tax Advisor in at year-end. Moreover, these thin capitalization rules will be re- Global Transfer Pricing Services at KPMG Belgium. placed in the future by the 30 percent EBIDA limitation as fore- They may be contacted at: seen in the European Anti-Tax Avoidance Directive. [email protected] Specific rules are, however, in place whereby excess interest [email protected] received by a director from its management company can be re- [email protected] qualified as dividends. The purpose of this rule is to avoid www.home.kpmg.com/be/en/home.html

12 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Brazil Jerry Levers de Abreu, Lucas de Lima Carvalho, and Mateus Tiagor Campos TozziniFreire Advogados, Brazil

1. How does your country identify fected by its characterization under the International and adjust related party financing Financial Reporting Standards (‘‘IFRS’’), especially following the general alignment between tax and ac- transactions? What is your country’s counting standards for IRPJ and CSLL purposes approach to determining whether under Law 12,973/2014. the debt arising from a related party Finally, because Brazilian Law does not allow for financing transaction should be treaty overrides (see Article 98 of the Brazilian Tax properly characterized as debt? Code (‘‘CTN’’)), the definition of interest in Article 11 or its equivalent of the Brazilian Bilateral Income Tax Apart from equity financing (or financing via capital Treaties (‘‘BITTs’’) in effect can be relevant for the contributions), Brazil identifies related party financ- identification of cross-border transactions that can ing transactions as those that represent a transfer of qualify as debt – if the lender or borrower in the rel- cash or equivalent resources (i) between related par- evant transaction with a Brazilian counterpart is a ties, and (ii) with an expectation of repayment within resident of a BITT jurisdiction. Also, considering the a generally predetermined period. Brazilian Tax Law prevalence of BITTs over domestic tax legislation, the adjusts related party financing transactions via their definition in Article 11 can even allow related party fi- corresponding interest expenses/revenues. For in- nancing transactions between persons resident in bound financing transactions, those interest payments Brazil and a BITT jurisdiction to be qualified differ- higher than a specific threshold under Brazilian trans- ently than those carried out between a person resident fer pricing and thin capitalization rules are propor- in Brazil and a resident in a non-BITT jurisdiction. tionally non-deductible for purposes of the Corporate Consider, for example, the BITTs with Hungary, India, Income Tax (‘‘IRPJ’’) and the Social Contribution on Portugal, and Turkey, which expressly state in their Ar- Net Profits (‘‘CSLL’’) under the Actual Profit Regime. ticle 11, § 4, that ‘‘interest’’ means income from bonds For outbound financing transactions, if interest rev- or debentures, ‘‘whether or not carrying a right to par- enues are lower than a specific threshold under Bra- ticipate in profits.’’ zilian transfer pricing rules, an amount of ‘‘deemed interest revenue’’ is to be added to the taxpayer’s IRPJ and CSLL taxable bases for the corresponding taxable 2. What rules or guidance exist in period, both in the Actual Profit Regime and in the your country to determine the arm’s Deemed Profit Regime.1 length interest rate for a related The qualification of a financing transaction as debt party financing transaction? is not well defined in Brazilian Law (or in Brazilian Tax Law). For instance, Advances for Future Capital The determination of the arm’s length interest rate for Increases (‘‘AFAC’’) are generally regarded as equity related party financing transactions is the subject of transactions, but a precedent from the Administrative Brazilian transfer pricing rules (even though thin Court of Tax Appeals (‘‘CARF’’) has already considered capitalization rules, which we comment on below, AFAC lasting more than two years to be a loan.2 On separately address the deductibility of interest ex- the other hand, convertible debentures are generally penses from the taxable bases of IRPJ and CSLL). As regarded by Brazilian Law as debt instruments, but is widely known, and was even referred to in the Final Brazilian Private Equity Funds meet minimum equity Report of OECD BEPS Actions 8, 9, and 10, Brazil holding criteria for regulatory and tax purposes with adopts a ‘‘statutory method approach’’ to transfer pric- holdings of convertible debentures (for instance, in ing, an approach that is dissimilar to the one in the light of their equity-like control of the issuer).3 As OECD Transfer Pricing Guidelines or to the one ad- noted above, a rule of thumb for the identification of opted by the United States. The section of the Brazil- debt instruments is whether the transfer of cash or ian transfer pricing rules that refers to related party equivalent resources corresponds to an expectation of financing transactions follows this ‘‘statutory method repayment within a generally predetermined period. approach.’’ Alternatively, the tax perspective on whether an in- Under Brazilian transfer pricing rules, the calcula- strument can be properly qualified as debt may be af- tion of the minimum interest revenue and the maxi-

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 13 mum interest expense is determined as base rate + spread. 3. Besides the determination of whether a Pursuant to the current rules, the base rate is (1) the ‘‘market transaction’s interest rate is at arm’s rate for sovereign bonds issued by the Federative Republic of Brazil in foreign markets in Brazilian Reais’’ for prefixed inter- length, what other factors does your est rates referred to in transactions that are denominated in country consider in deciding whether the Brazilian Reais, (ii) the ‘‘market rate for sovereign bonds issued related party financing is arm’s length by the Federative Republic of Brazil in foreign markets in U.S. Dollars’’ for prefixed interest rates in transactions that are de- and acceptable overall? Examples of nominated in U.S. Dollars, and (iii) the ‘‘LIBOR rate for 06 (six) additional factors may include: months’’ for transactions that are denominated in currencies contractual terms, functions of the other than Brazilian Reais or U.S. Dollars and/or have a post companies involved, characteristics of the fixed interest rate. Additionally, the spread currently set forth by Ordinance MF 427/2013 is (a) 2.5% for outbound transac- companies’ financial products or services, tions, and (b) 3.5% for inbound transactions. economic circumstances, or business Brazilian thin capitalization rules apply in addition to trans- strategies. fer pricing and general deductibility rules (in other words, com- pliance with these rules is not an option). In the case of loans In addition to our comments above, there is also a rule viewed from a related party neither resident in a tax haven jurisdiction by domestic tax authorities as a General Anti-Abuse Rule nor entitled to a beneficial tax regime under Normative Instruc- (‘‘GAAR’’) in Article 116, sole paragraph, of CTN. Pursuant to tion RFB 1,037/2010: this rule, domestic tax authorities usually test domestic and (a) If the foreign lender has a participation in the Brazilian cross-border transactions under standards of ‘‘economic sub- borrowing company’s equity, the total debt may not exceed two stance’’ and ‘‘business purpose’’ (which are not defined in Fed- times the amount of the participation of the lender in the Bra- eral Law). If, for example, they find that a cross-border related zilian company’s net equity (total debt with foreign lender/ party financing transaction was in fact a sham, they may assess lender’s equity ratio 2:1). IRPJ and CSLL on any corresponding interest deductions taken (b) If the foreign lender does not have a participation in the by the Brazilian borrower, plus a fine of up to 150% (generally Brazilian borrowing company’s equity, the total debt may not 75%) and SELIC interest (currently set at 6.5% per annum). On exceed two times the Brazilian company’s net equity (total debt the other hand, if the Brazilian party in the transaction is the with foreign lender/net equity ratio 2:1). lender (and the transaction is viewed by tax authorities as a (c) In either of the two cases above, the total amount of debt sham), the principal of the loan may be regarded as a ‘‘payment with related parties residing abroad may not exceed two times without cause’’ to a non-resident person, subject to a Withhold- the amount of the direct participations of all related parties ing Income Tax (‘‘IRRF’’) of 35% on a grossed-up basis, plus a which are lenders and are not located in a tax haven or a privi- fine of up to 150% and SELIC interest (in the event of a tax as- leged fiscal regime in the Brazilian company’s net equity (total sessment). debt with foreign related parties/related parties equity ratio 2:1). Such a limit is not applicable where the Brazilian com- Under general deductibility rules in Article 299 of the Income pany only has debts with related persons that do not have direct Tax Regulations (‘‘RIR/99’’), interest expenses will be deductible participation in its equity. In this case, the value of the sum of for purposes of IRPJ and CSLL under the Actual Profit Regime the all company’s debts cannot exceed twice the value of the if they are (i) usual, (ii) necessary for the maintenance of the Brazilian company’s net equity (total debt with foreign parties/ productive source of the taxpayer, and (iii) effectively incurred net equity ratio 2:1). (documented as paid). Practical applications of those stan- If the lender is a resident of a tax haven jurisdiction or is en- dards by tax authorities vary, but they may touch upon charac- titled to a beneficial tax regime (irrespective of whether they are teristics of the companies’ financial products or services, as related to the borrower or not), different thin capitalization well as loans/credit operations conducted by the lender in prox- rules apply. In this case, subject to compliance with additional reporting/substance rules in Article 26 of Law 12,249/2010, the imity to the relevant cross-border loan (e.g., expenses associ- total amount of debt may not exceed 30% of the Brazilian com- ated with a loan entered into to acquire resources for a pany’s net equity (total debt with foreign lender in tax haven or subsequent loan to a related party may not meet the criteria of subject to beneficial tax regime/net equity ratio 0.3:1). Article 299 of RIR/99).

14 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 4. If it is determined that any part of a on cases we have seen, but its outcome is plausible under the 6 related party transaction should not be terminology used by the Law. q For outbound transactions, the Brazilian lender is regarded characterized as debt, what are the by tax authorities as having contributed cash or equivalent re- consequences to both the borrower and sources to the share capital of a nonresident party. The tax im- the related lender? plications are as follows:

If Brazilian tax authorities determine that any part (or the to- Main tax implications: tality) of a related party transaction should not be character- o No deductibility issues for IRPJ and CSLL purposes should ized as debt, they may do so one of two reasons: arise in this scenario, given that the cross-border transfer of (i) The tax authorities view that the transaction is in fact an debt/loan principal is not deductible per se. A re- equity transaction, or characterization of that debt/loan principal as a capital contri- (ii) The tax authorities view that the transaction is a payment bution, which is also non-deductible from the taxable bases of without cause. IRPJ and CSLL per se, should not cause tax implications for the 7 If we assume that a related party transaction is deter- Brazilian lender. mined by the Brazilian tax authorities to be a debt transac- o An equity holding abroad could trigger the application of tion by reason of item (i), meaning the tax authorities view Brazilian Controlled Foreign Company (‘‘CFC’’) rules, which re- the transaction is in fact an equity transaction, the follow- quire Brazilian corporate taxpayers to include profits of CFCs ing discussion applies: (or non-qualified affiliated CFCs) in their taxable profits for q For inbound transactions, the Brazilian borrower is regarded IRPJ and CSLL purposes on December 31 of the calendar year. by tax authorities as having received an equity investment However, we have yet to see a case in Brazilian administrative from a nonresident party. The tax implications are as follows: or judicial courts discussing this particular issue. o From the standpoint of the Brazilian state of which the Main tax implications: lender is a resident, though this is debatable under constitu- o Payments of interest from the Brazilian borrower to the tional rules, ITCMD might be imposed at a rate of up to 8% on nonresident lender may be regarded as entirely non-deductible the amount of the interest received from the nonresident bor- for IRPJ and CSLL purposes under the Actual Profit Regime. If rower. Additionally, we believe that states should not impose a deduction has been recorded by the taxpayer, the correspond- ITCMD on the amount of the ‘‘capital contribution’’ made by ing unpaid IRPJ and CSLL (at an aggregate rate of up to 34%) the Brazilian lender to the nonresident borrower (which would may be assessed by the federal tax authorities, plus a fine of 4 be inconsistent with their claim that the debt transaction is in 75% (up to 150%, in case of a sham), plus SELIC interest. fact an equity transaction). o Given that the payments of interest are not justified in light Ancillary tax implications: of the tax treatment of the related party transaction, an IRRF o A question could arise as to whether the Brazilian lender in on a payment without cause may be imposed by the tax authori- this scenario would have to consider its nonresident borrower ties, at a rate of 35%, on the grossed-up amount of the pay- as a ‘‘member’’ of its multinational group for purposes of the ments. If that tax is subject to an assessment by the federal tax Country-by-Country Reporting (‘‘CbCR’’) obligations. This is authorities, it will be imposed with a fine of 75% (up to 150%, because Article 2, §§ 1 and 2 of Normative Instruction RFB in case of a sham), plus SELIC interest. 1,681/2018 has terminology that would allow specific creditors o Inbound loan agreements are subject to the imposition of of non-resident legal entities to be viewed by Brazil as ‘‘control- Tax on Foreign Exchange Transactions (‘‘IOF-FX’’) at 0% (if the ling entities.’’ If that is the interpretation of the federal tax au- minimum average period of the loan is greater than or equal to thorities, safe for filing exceptions established in Normative 180 days) or 6% (if the minimum average period is fewer than Instruction RFB 1,681/2018 (chief among which is the yearly 180 days) rates. Nevertheless, the applicable rate for equity in- gross revenues of the multinational groups subject to CbCR of vestments is 0.38%. Therefore, (a) the taxpayer will be liable for at least a 750,000,000.00),8 they might require the Brazilian the unpaid IOF-FX at a 0.38% rate if the minimum average lender to include its nonresident borrower in its CbCR filing for period of the loan is greater than or equal to 180 days, or (b) if the calendar year. the average period is fewer than 180 days, the lender will have If we assume that a related party transaction is deter- a tax credit with regard to IOF-FX. mined by the Brazilian tax authorities to be a debt transac- o From the standpoint of the Brazilian state of which the bor- tion by reason of item (ii), meaning the tax authorities view rower is a resident, a Tax on Donations (‘‘ITCMD’’) might be im- that the transaction is a payment without cause, the follow- posed on the amount of interest paid to the nonresident lender ing discussion applies: (because the loan is disregarded as debt in this alternative). q For inbound transactions, the Brazilian borrower is regarded Rates vary among the states, but the maximum rate of ITCMD as having received a donation or a payment without cause is currently 8%.5 Non-collection may be subject to a state tax from a nonresident party. The tax implications are as follows: assessment that can request the payment of the tax, plus a fine of up to 100% (in the State of Sa˜o Paulo), plus SELIC interest. Main tax implications: Ancillary tax implication: o The main tax implications are generally those applicable to o It is possible that the federal tax authorities’ characteriza- inbound transactions under the fact pattern of (i) above. The tion of a debt instrument as equity might affect the registration two differences lie in the following: of the Ultimate Beneficial Owner (‘‘UBO’’) of the Brazilian bor- (1) Taxation of the amount received as a donation (in fact, the rower. The UBO legislation in Brazil is relatively recent (2016), principal amount of the loan) by IRPJ and CSLL at an aggre- and the terms used to identify the proper route to find an UBO gate rate of up to 34%, plus PIS/COFINS at an aggregate rate of are broad enough to encompass a loan re-characterized as 9.25%. equity, if the amount of the ‘‘capital contribution’’ resulting (2) Taxation by state tax authorities, via ITCMD, of the dona- from the loan exceeds 25% of the total amount of (a) the re- tion received (the principal of the debt/loan re-characterized by characterized loan principal and (b) the existing share capital state tax authorities as a donation). In this scenario, state tax of the Brazilian borrower. Again, this assumption is not based authorities would not be adopting an inconsistent position by

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 15 taxing both the interest paid by the Brazilian borrower (be- pricing rules on intercompany financing transactions. In the cause they do not view that payment as interest) and the Administrative Court of Tax Appeals (CARF), one binding prec- amount of the donation received (because they do not claim edent issued by its Superior Chamber (the Superior Chamber that amount is a ‘‘capital contribution’’ under state tax rules). of Tax Appeals, or ‘‘CSRF’’) in 2016 claims that for the years Ancillary tax implication: 1997 and 1998, a taxpayer could not be required to apply trans- o The ancillary tax implication mentioned for inbound trans- fer pricing rules on outbound financing transactions because an actions under the fact pattern of (i), above, should not apply to exception then in effect in Law 9,430/1996 allowed domestic this case. Our comments on (i) referred to a situation in which taxpayers to avoid the application of transfer pricing rules if the federal tax authorities viewed the principal of the debt/loan as loan contract was registered before the Brazilian Central Bank a ‘‘capital contribution’’ made by the nonresident lender to the (‘‘BACEN’’).9 That precedent, however, does not seem appli- Brazilian borrower. In this case, federal tax authorities view the cable to operations carried out after September 2012 (when the payment as a donation (therefore, not an event associated with old provision was revoked by Law 12,715/2012). a possible route for a UBO registration). q For outbound transactions, the Brazilian lender is regarded Jerry Levers de Abreu is a Partner at TozziniFreire Advogados, Sao Paulo; as having made a donation or a payment without cause to a Lucas de Lima Carvalho is a Senior Tax Associate at TozziniFreire Advogados, Sao Paulo; and Mateus Tiagor Campos is a Junior Associate at nonresident party. The tax implications are as follows: TozziniFreire Advogados, Sao Paulo. Main tax implications: They may be contacted at: o The main tax implications are generally those applicable to [email protected] outbound transactions under the fact pattern of (i), above. The [email protected] three differences lie in the following: [email protected] (1) The federal tax authorities would be able to tax payments/ www.tozzinifreire.com.br donations made by the Brazilian lender (originally, the princi- pal amounts of the debt/loan) under the payment without cause rules described above. NOTES 1 (2) Brazilian CFC rules should not apply to this structure, The Actual Profit Regime of IRPJ and CSLL allows for itemized given that the relationship between the Brazilian lender and the deductions. The Deemed Profit Regime is based on a statutory per- centage of gross revenues, and taxpayers can only report their prof- nonresident borrower in this scenario arises out of a donation, its under the Deemed Profit Regime if they are not required by law not a capital contribution. to report profits under the Actual Profit Regime. See Articles 13 and (3) States would be free to impose both available ITCMDs on 14 of Law 9,718/1998. Also, our comments about the application of the cash flows of this structure: one on the interest received by transfer pricing and thin capitalization rules (for inbound financ- the Brazilian lender (already applicable under the fact pattern ing transactions) do not exclude concerns with general deductibil- of (i)) and one on the donation made by the Brazilian lender to ity rules for IRPJ and CSL purposes. the nonresident borrower (In (i), this would have been incon- 2 See CARF. Ruling 3301-002.282. Third Section, Third Chamber, sistent with the position of labeling the principal amount of the First Ordinary Group. Rapp. Couns. Andrada Ma´rcio Canuto Natal. debt/loan as a ‘‘capital contribution.’’). Session of March 27, 2014. Published on August 26, 2014. Ancillary tax implication: 3 See Article 32, § 3rd, of Normative Instruction RFB 1,585/2015. o The ancillary tax implication mentioned for outbound See also Article 11, § 1st, of CVM Instruction 578/2016. transactions under the fact pattern of (i), above, should not 4 See note 1 above. The issue of non-deductibility of interest pay- apply in this case. ments for IRPJ and CSLL purposes would not affect taxpayers re- porting profits under the Deemed Profit Regime. 5. Are there any relevant court cases or tax 5 See Article 1st of Senate Resolution 09/1992. rulings in your country dealing with the 6 See Article 8th, § 2nd, item I, of Normative Instruction RFB 1,634/ transfer pricing of intercompany financing 2016. transactions? 7 See notes 1 and 6 above. 8 See Article 4th, item II, of Normative Instruction RFB 1,681/2018. We have not identified any binding precedents by the Superior 9 See CARF. Ruling 9101-002.313. Superior Chamber, First Group. Court of Justice (‘‘STJ’’) or the Federal Supreme Court (‘‘STF’’) Rapp. Couns. Rafael Vidal de Araujo. Session of May 3, 2016. Pub- on matters relating specifically to the application of transfer lished on May 18, 2016.

16 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Canada Richard Garland and Inna Golodniuk Deloitte LLP, Canada

1. How does your country identify Historically, the Canadian tax treatment of a finan- and adjust related party financing cial instrument has followed the legal form of a tax- payer’s transaction under the applicable commercial transactions? What is you country’s law. The Canadian tax jurisprudence established that approach to determining whether applying an economic substance approach (instead of the debt arising from a related party following the legal form) was generally not permis- financing transaction should be sible. In the Shell Canada case, the Supreme Court of properly characterized as debt? Canada stated: This Court has repeatedly held that courts must be The Canada Revenue Agency (‘‘CRA’’) auditors usually sensitive to the economic realities of a particular trans- identify related party transactions as part of a regular action rather than being bound to what appears to be its corporate tax audit. The information return filed by legal form. But there are at least two caveats to this rule. Canadian taxpayers in respect of intercompany trans- First, this court has never held that the economic reali- actions with non-residents (Form T106), which tax- ties of a situation can be used to re-characterize a tax- payers must file annually, can also be used for payer’s bona fide legal relationships. To the contrary, we selecting taxpayers for a transfer pricing audit of spe- have held that, absent a specific provision of the Act to cific transactions. The T106 form discloses the quan- the contrary or a finding that they are a sham, the tax- tum and type of intercompany transactions, including payer’s legal relationships must be respected in tax 1 material related party financing transactions. cases. Re-characterization is only permissible if the The Canadian tax implications of a related party fi- label attached by the taxpayer to the particular transac- nancing depend on whether the instrument is charac- tion does not properly reflect its actual legal effect. 4 terized as debt or equity for Canadian tax purposes – The Shell Canada case dealt with a non-transfer interest payments on debt may, subject to various cri- pricing issue during tax years that preceded the intro- 2 teria, be deductible for income tax purposes, whereas duction of section 247 of the Act – as such, we would 3 dividend payments on equity are not deductible. not expect the decision to have been different had sec- Section 247 of the Canada’s Income Tax Act (‘‘the tion 247 of the Act been in existence for the relevant Act’’) embodies the arm’s length principle and requires years (i.e., section 247 would likely have had no rel- that, for Canadian tax purposes, related party cross- evance to the issue). While the Shell Canada case does border transactions must use the terms and condi- not provide any direct commentary about section 247, tions that would have been made between persons it does provide an indication of the extent to which dealing at arm’s length. Canadian courts have tended to resist using economic Paragraphs 247(2) (a) and (c) of the Act allow the substance to disregard or re-characterize the legal CRA to make a transfer pricing adjustment if the form of a transaction. terms or conditions of a controlled transaction differs Despite the general principle enunciated in the Shell from the terms and conditions that would have been Canada case, section 247 is one of a few provisions of made between persons dealing at arm’s length. In the the Act that, if applicable, allow the tax consequences case of a loan, this would typically result in an adjust- to be based on the economic substance of the transac- ment to the interest rate and the amount of interest tion, rather than the legal form. income or expense. As noted above, in order to re-characterize a trans- Paragraphs 247(2) (b) and (d) of the Act provide for action, two tests must be met. First, it must be demon- the re-characterization of a transaction. To re- strated that arm’s-length parties would not have characterize a transaction, the following conditions entered into the transaction as structured; and must be met: second, it must be demonstrated that the transaction 5 q The transaction would not have been entered into was undertaken primarily to obtain a tax benefit. between persons dealing at arm’s length, and While at the time of this publication there is no Cana- dian tax jurisprudence on the re-characterization pro- q The transaction can reasonably be considered not vision, the authors note that the CRA has recently to have been entered into primarily for bona fide pur- been challenging an increasing number of transac- poses, other than to obtain a tax benefit. tions based on paragraphs 247(2) (b) and (d) (includ-

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 17 ing re-characterizing financial transactions into equity and factors in the OECD TPG as being important in determining disallowing the interest deduction). the degree of comparability. These five factors, per the 2017 OECD TPG, are: (i) the contractual terms; (ii) a functional 2. What rules or guidance exist in your analysis; (iii) the characteristics of the property transferred or country to determine the arm’s length services provided; (iv) the economic circumstances of the par- ties; and (v) the business strategies pursued by the parties. interest rate for a related party financing When determining contractual terms for an intercompany fi- transaction? nancing, it is critical in the current audit environment to use the terms that are consistent with arm’s length observations Financing transactions are analyzed by applying the arm’s (discussed below). Once the intercompany terms and condi- length principle, and in so doing, the CRA endorses and follows tions are established, it is equally important to select, as bench- the OECD’s Transfer Pricing Guidelines for Multinational En- marks for pricing purposes, uncontrolled transactions with terprises and Tax Administrations (‘‘OECD TPG’’). There are no closely comparable contractual terms. Other comparability legislative provisions or published administrative guidance on factors, such as the economic circumstances of the parties or transfer pricing methods applicable specifically to financing the business strategies pursued by the parties, do not seem to transactions. be as commonly scrutinized by the CRA. In practice, the comparable uncontrolled price (‘‘CUP’’) method is commonly selected as the most appropriate method to determine interest rates for an intercompany financing 3. Besides the determination of whether a transaction. transaction’s interest rate is at arm’s Borrower- and issue-specific creditworthiness are key inputs length, what other factors does your used in the application of the CUP method. Under the current country consider in deciding whether the Canadian case law, a borrower’s overall creditworthiness should also be determined considering implicit support of the related party financing is at arm’s length multinational group. The GE Capital case,6 outlined below, and acceptable overall? Examples of considered a parent company’s implicit support. This has additional factors may include: become a common consideration in applying the arm’s length contractual terms, functions of the principle and an integral part of Canadian transfer pricing companies involved, characteristics of the analyses of financing transactions. companies’ financial products or services, Therefore, three key components of creditworthiness analy- ses are typically performed for transfer pricing purposes: economic circumstances, or business q The borrower’s stand-alone creditworthiness is determined strategies. by evaluating a number of factors, including the entity’s his- As explained above, Canadian transfer pricing law requires that toric, current, and prospective financial position; the industry related party cross-border transactions be priced at amounts in which it operates and its position in that industry; business that would result from using the terms and conditions that profile (e.g., size and diversification); and other factors related would have been undertaken between persons dealing at arm’s to the borrower’s stand-alone ability to maintain and enhance length. Since the law refers to ‘‘the terms and conditions’’ that competitive position. (rather than a transfer price, for example), transfer pricing q The implicit support analysis factors in the multinational analyses typically involve taking into account all economically group’s willingness and ability to support the borrower in the relevant terms and conditions and the circumstances that have event of credit distress. Practitioners often rely on guidance a bearing on the price. In the authors’ experience, the CRA from credit rating agencies to analyze the strength of implicit commonly challenges terms and conditions of related party fi- support for transfer pricing purposes. Generally, the parent’s nancing and can impute a term that it views to be an arm’s willingness to support a subsidiary depends on the subsid- length term to adjust an interest rate. Examples of contractual iary’s strategic importance to the multinational group, the terms that are often scrutinized include term to maturity, prin- level of ownership, and the integration of the business. The cipal amount, subordination, and embedded options. The cur- more interrelated, strategic, and significant in size the subsid- rent practice is therefore to analyze market information to iary, the more likely it is that the parent group would be will- confirm that contemplated terms and conditions are observed ing to support the subsidiary in a credit distress event. Where in the market and are consistent with a borrower’s business implicit support is considered to exist, it is factored in as an purpose and economic behavior when dealing with unrelated uplift to borrower’s stand-alone creditworthiness.7 creditors. q Issue-specific creditworthiness is typically established by ad- justing the borrower’s overall creditworthiness, if appropri- ate, for structural or contractual subordination.8 4. If it is determined that any part of a Data on both internal and external comparable uncontrolled related party transaction should not be transactions can be used to apply the CUP method, provided an characterized as debt, what are the acceptable degree of comparability has been established be- consequences to both the borrower and tween an uncontrolled transaction and the related party trans- the related lender? action under analysis. While non-transactional information (e.g., bank quotes, industry statistics) may provide a useful ref- Where it is determined that a transaction should not be charac- erence point, it is generally not accepted for the purposes of ap- terized as debt, any associated interest will be disallowed and plying the CUP method. treated as dividend deemed to have been paid to the non- The CRA’s transfer pricing circular9 emphasizes the impor- resident lender.10 In such a situation, the Canadian borrower tance of a high degree of comparability between uncontrolled will be required to pay additional income taxes resulting from transactions and the tested controlled transaction to reliably the disallowance of the intercompany interest amounts, plus apply the CUP method. The CRA quotes all five comparability interest on the additional taxes owing.11 The amount of

18 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 deemed dividend will be subject to non-resident withholding of the subsidiary, it is necessary to consider the potential uplift tax at the applicable rate.12 due to support from the parent group that would exist in the ab- Where there is a transfer pricing adjustment that increases sence of a formal guarantee. The FCA concurred that implicit income (e.g., a disallowance of interest expense), the Canadian support had to be taken into account because determining taxpayer may also be liable for a transfer pricing penalty.13 A arm’s length pricing ‘‘involves taking into account all the circum- penalty can be applied where there is a transfer pricing adjust- stances which bear on the price whether they arise from the rela- ment that exceeds the lesser of $5 million or 10% of gross re- tionship or otherwise.’’20 ceipts. The penalty amount is 10% of the transfer pricing adjustment (not the additional tax owing). The penalty is not Richard Garland is a Partner and Inna Golodniuk is a Senior Manager at imposed where the taxpayer made reasonable efforts to deter- Deloitte LLP,Toronto, Canada. They may be contacted at: mine and use arm’s length transfer prices.14 Though the law [email protected] does not define what a ‘‘reasonable effort’’ is, the Act does deem [email protected] a taxpayer to have failed the reasonable efforts standard if it www.deloitte.com/ca does not maintain adequate transfer pricing documentation.15 One of the CRA’s transfer pricing memoranda, TPM-09,16 pro- vides the CRA’s view on what constitutes reasonable efforts. Ac- NOTES cording to TPM-09, a reasonable effort is ‘‘the degree of effort 1 The taxpayer must indicate on the T106 whether contemporane- that an independent and competent person engaged in the same ous documentation was prepared in respect of transactions. line of business or endeavour would exercise under similar cir- 2 The rules related to interest deductibility are complex and are cumstances.’’ Despite the law requiring reasonable ‘‘efforts’’ beyond the scope of this article. rather than a reasonable outcome, the CRA seems to show 3 From the recipient’s point of view in a cross-border intercompany some proclivity to assess penalties when a transaction is re- context, interest income of a Canadian corporation is included in characterized, even where there is extensive transfer pricing income for tax purposes, whereas dividends received on a share of documentation. a foreign entity are initially included in income, but then deduc- To resolve any double taxation resulting from interest ex- tions may be available to offset this dividend income inclusion. The pense disallowance, the Canadian taxpayer may request assis- rules related to the taxation of dividends are beyond the scope of tance from the Canadian competent authority where there is a this article. 4 tax treaty with the lender’s country. Assistance by the Canadian Shell Canada Ltd. v. Canada, [1999] 3 SCR 622, paragraph 39. 5 competent authority is generally provided under the mutual Generally, the burden of proof lies with the taxpayer. 6 agreement procedure (MAP) article contained in Canada’s tax General Electric Capital Canada Inc. v. Her Majesty the Queen, 2010 FCA 344; aff’g. 2009 TCC 563. conventions. However, the Canadian competent authority gen- 7 In certain situations, a subsidiary can be characterized as core or erally will not negotiate cases where the reassessment is pursu- highly strategic to the group. With the implicit support, the core ant to the general anti-avoidance rule in the Act17 or another subsidiary’s overall creditworthiness may be equalized with that of specific anti-avoidance provision of the Act.18 It is understood the group. Overall creditworthiness of a highly strategic subsidiary that this position would also be taken in the case of a re- is typically one notch lower than the group’s creditworthiness. characterization. This means that the Canadian competent au- 8 Structurally or contractually subordinated debt instruments are thority would typically only forward the case to the other those under which the claim on the company’s assets or earnings is country’s competent authority for any relief that the other subordinate to other claims due to structural or contractual ar- country may provide. rangements. 9 Information Circular 87-2R, International Transfer Pricing, Sep- 5. Are there any relevant court cases or tax tember 27, 1999. rulings in your country dealing with the 10 Subsection 247(12), where interest is disallowed subject to sub- section 247(2) of the Act. transfer pricing of intercompany financing 11 Or, if in a loss position, the borrower will be required to adjust transactions? available net operating losses. 12 Subsection 212(2) of the Act. GE Capital Case19 13 Subsection 247(3) of the Act. The Tax Court of Canada (‘‘TCC’’) dealt with a one-percent 14 Ibid. guarantee fee paid by a Canadian taxpayer, General Electric 15 A taxpayer is deemed not to have made reasonable efforts unless Capital Canada Inc. (‘‘GE Capital Canada’’), to its U.S. parent, its transfer pricing documentation is prepared by the tax return due who provided a guarantee of GE Capital Canada’s external bor- date and provided to the Minister within three months of a request. rowing. The court established that without the guarantee from As a minimum, the documentation must contain information listed its parent, the borrowing cost of GE Capital Canada would have in subsection 247 (4). been higher. The TCC ruled that the guarantee fee did not 16 CRA, TPM-09, Reasonable efforts under section 247 of the Income exceed an arm’s length amount. The Federal Court of Appeal Tax Act, September 18, 2006. (‘‘FCA’’) upheld the TCC’s decision that the guarantee fee did not 17 Section 245 of the Act. exceed an arm’s length price. 18 See CRA, Information Circular 71-17R5, Guidance on Competent Among other matters, the case considered an appropriate Authority Assistance Under Canada’s Tax Conventions, January 1, method for determining the creditworthiness of GE Capital 2005. Canada in order to establish credit enhancement from the guar- 19 Supra footnote 5. antee. The TCC ruled that when assessing the creditworthiness 20 Supra footnote 5, FCA.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 19 Denmark Arne Møllin Ottosen and Casper Jensen Kromann Reumert, Copenhagen

1. How does your country identify intercompany financing, could result in an increase in and adjust related party financing cases of debt re-characterization. It is noted that the position presented in the discussion draft represents a transactions? What is you country’s significant change compared to the 2010 Transfer approach to determining whether Pricing Guidelines, which restricted debt re- the debt arising from a related party characterization to exceptional cases. However, the financing transaction should be considerations in the discussion draft build on the properly characterized as debt? principle of accurate delineation embedded in the 2017 Transfer Pricing Guidelines, which – in the view Generally speaking, an intercompany financing ar- of the Danish tax authorities – are applicable under rangement that legally qualifies as a debt arrangement the Danish arm’s length standard. is recognized as such for transfer pricing and other Also, Danish tax laws provide for debt re- tax purposes. However, for Danish tax purposes, there characterization in certain cases covered by a specific is no general statutory definition of debt (or interest). statute. As an example, loans issued by companies to In practice, an intercompany debt financing ar- controlling shareholders who are individuals may be rangement that is structured as a conventional debt reclassified into taxable dividends, subject to certain arrangement — i.e., debt based on an enforceable and conditions.1 Further, the Danish thin capitalization binding debt instrument, interest calculated as a per- regime (debt-to-equity ratio of 4:1) provides for re- centage of the loan principal, etc. — will rarely be characterization in that deductibility of interest on in- challenged in terms of characterization. tercompany debt above a certain threshold may be In transfer pricing audits and disputes, the primary restricted.2 The Danish tax authorities’ current posi- focus of the arm’s length test is on debt pricing, mean- tion is that the arm’s length principle is inapplicable to ing interest rates and any other loan fees. Generally, the debt-to-equity ratio in cases covered by the thin the risk of reclassification is restricted to special cases, capitalization regime; however, this position could such as cases where the arrangement does not have change due to OECD developments. the true or typical features of a debt arrangement or In addition, Danish tax laws include hybrid mis- where the provision of funds would clearly not have match rules. As an example, intercompany debt owed been structured as a debt arrangement at arm’s by a Danish group member to a nonresident affiliate length. will be re-characterized into equity if characterized as Consider the following example where a parent such under foreign tax laws, meaning that interest company makes a loan to its subsidiary. If it is clear payments will be deemed (non-deductible) divi- that the borrowing subsidiary would never be able to dends.3 Similar mismatch rules apply to inbound divi- service the loan under the applicable terms, the loan dends and equity contributions (i.e., taxable if the may be re-characterized in whole (or in part) as an distribution or contribution is deductible under for- equity contribution rather than a loan. A comparable eign tax laws), for example. example of this type of arrangement is included in paragraph 17 of the recently released OECD discus- sion draft on financial transactions (BEPS discussion 2. What rules or guidance exist in draft on the transfer pricing aspects of financial transac- your country to determine the arm’s tions, July 3, 2018). Another example would be pay- length interest rate for a related ments made by a borrower that are not calculated as a party financing transaction? percentage of the loan principal but as a percentage of the borrower’s profits. Generally, such payments will In Denmark, there are no special transfer pricing rules not be recognized as (deductible) interest payments. for determining the arm’s length interest rate on inter- The Danish transfer pricing position is highly influ- company debt, though some guidance is available. enced by OECD standards. The Danish tax authorities In particular, the Danish tax authorities’ transfer will likely follow the OECD developments closely, so pricing guidelines suggest the use of certain methods the recently released discussion draft on financing for the pricing of intercompany loans, including the transactions, particularly the considerations on accu- Comparable Uncontrolled Price (‘‘CUP’’) method and rate delineation of the actual transaction in relation to the ‘‘loan margin method.’’ The application of the CUP

20 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 method in relation to intercompany loans relies on the guid- 4. If it is determined that any part of a ance outlined in the OECD Transfer Pricing Guidelines. The related party transaction should not be loan margin method uses the costs of the affiliated lender, such characterized as debt, what are the as interest and costs attributable to credit facility management consequences to both the borrower and and, based on functions and risks, adds a mark-up to these the related lender? costs. A comparability analysis is, of course, necessary. Non-recognized debt may be reclassified into deemed equity Further, pursuant to the tax authorities’ transfer pricing contributions (‘‘downstream’’) or dividends (‘‘upstream’’). Gen- guidelines, the Danish National Bank’s discount rate plus 4% erally, intercompany equity contributions and dividends are can be used as a last resort if there is no other way to reliably tax-exempt for the payee and non-deductible for the contribut- determine an arm’s length interest. This default rule is founded ing or distributing entity, subject to certain conditions in cross- on a statement made by the Danish Minister of Taxation, and it border arrangements, including mismatch rules, etc. The implications of re-characterization pursuant to a specific stat- has been confirmed by court rulings. ute depend on the applicable rule (see examples mentioned In practice, the analysis is often conducted through database above). searches. The arm’s length interest rate components will typi- As discussed previously, intercompany financing arrange- ments that are legally structured as conventional debt arrange- cally include a reference rate (for example, an applicable inter- ments are generally recognized as such for Danish transfer bank offered rate that adheres to the main terms of the loan pricing purposes, meaning that the discussion above on (currency, term, etc.)), and then a spread based on the credit deemed equity contributions and dividends will typically be re- rating of the borrower and other price-relevant specifics of the stricted to any non-arm’s length interest components (i.e., sec- loan. Generally, the discount rate plus 4% is not an appropriate ondary transactions). standard for cross-border intercompany debt arrangements subject to transfer pricing documentation rules but may be ap- 5. Are there any relevant court cases or tax propriate for ‘‘small’’ domestic loan transactions between resi- rulings in your country dealing with the dent shareholders (individuals) and controlled companies. transfer pricing of intercompany financing transactions? 3. Besides the determination of whether a A number of rulings have been issued on domestic financial transaction’s interest rate is at arm’s transactions, including court rulings that confirm the use of discount rate plus 4% as the arm’s length interest rate in certain length, what other factors does your cases. However, case law on cross-border intercompany financ- country consider in deciding whether the ing is limited. In 2014, the Danish Tax Tribunal (administrative related party financing is arm’s length tax court) ruled in a case involving a cross-border cash pool ar- rangement (zero-balancing). The Tax Tribunal held that in the and acceptable overall? Examples of absence of documentation suggesting a differentiation between additional factors may include: the interest rate on deposits and loans, the same rate should be contractual terms, functions of the applied. Also, based on the circumstances of the case, the Tri- bunal found the credit rating of the group to be applicable to companies involved, characteristics of the the arm’s length interest determination. companies’ financial products or services, Arne Møllin Ottosen is a Partner and Head of Tax at Kromann Reumert in economic circumstances, or business Copenhagen; Casper Jensen is an Attorney and member of Kromann strategies. Reumert’s tax team in Copenhagen. They may be contacted at: [email protected] In practice, the arm’s length test in relation to intercompany fi- [email protected] nancing typically revolves around interest rates and other pric- www.kromannreumert.com ing components, such as commitment fees and other similar factors, if applicable. Contractual terms, including currency NOTES and loan term, and other factors, such as credit rating and 1 See section 16 E of the Danish Tax Assessment Act. functional analysis, play an important role in the comparabil- 2 See section 11 of the Danish Corporation Tax Act. ity test. 3 See section2BoftheDanish Corporation Tax Act.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 21 France Julien Monsenego, Thibaud Boucharlat, and Guillaume Madelpuech Gowling WLG and NERA Economic Consulting

1. How does your country identify accounting principles. As a matter of principle, shares and adjust related party financing are treated as equity and non-share instruments as debt. For example, the official guidelines released by transactions? What is your country’s the FTA to describe the taxable regime of Sukuk cer- approach to determining whether tificates indicate that the they should qualify as a debt the debt arising from a related party instrument, as they do not carry the rights usually financing transaction should be granted to shareholders, such as voting rights in the properly characterized as debt? issuers or the rights to the liquidation surplus (BOI- DJC-FIN-20-20120912, § 60). According to case law Articles in the French Tax Code (FTC) dealing with re- from the French Administrative Supreme Court, lated party financing transactions (mainly to limit the when parties are located in different countries, the deduction of interest expenses) define ‘‘related party’’ legal, tax, and/or accounting treatment of the instru- as follows: ment in the other country — the country of the issuer, 1) By reference to Article L. 233-3 of the French Com- for instance — constitutes an indication that should mercial Code, which specifies the circumstances be taken into account but which is no way binding or under which a company is considered to form part even a predominant element in the characterization 2 of the same group as another company. By virtue of process. this Article, an individual or a company is deemed Finally, it should be noted that in 2014 France intro- to be controlling another in the following situa- duced an anti-hybrid provision by virtue of which in- tions: terest paid by a French enterprise to a related entity is q It directly or indirectly holds a part of the share not tax deductible if the interest paid is not subject to capital, conferring to it the majority of the voting tax at the level of the beneficiary company at a rate of rights in the general meetings of the company; at least 25% of the French CIT that would have been q It alone holds the majority of the voting rights in due under the standard French rules. When the the company by virtue of an agreement with paying entity is located in France, the FTA therefore other shareholders, which is not contrary to the no longer has to challenge the legal qualification of interests of the company; the instrument to deny the deductibility of the ex- q In practice, it determines the decisions in the penses. general meetings of the company; In order to review related party financing transac- q It can nominate or dismiss a majority of the tions and, in particular their pricing conditions, the board members ; FTA may rely — in addition to the application of tax treaty law — upon the articles and concepts below: It is worth noting that control is presumed when a q company directly or indirectly holds a share of the Article 57 of the FTC, which provides the general voting rights that exceeds 40%, and no other share- French transfer pricing (‘‘TP’’) rules; holder holds a higher share. q The wider concept of the abnormal management 2) By reference to the definition provided by section act (acte anormal de gestion), which provides for the 12 of Article 39 of the FTC, pursuant to which two requirement that a company be managed according companies are treated as related where: (a) one of to its individual corporate interests for tax purposes; them has a direct or indirect minimum holding of /The abnormal management act concept is often 50% in the capital of the other or exercises de facto used for cases involving French related parties control1 over the other company or (b) a third com- only, while Article 57 of the FTC is often used pany has a direct or indirect minimum holding of for operations involving a non-French related 50% in the capital of the two companies or exercises party. de facto control over the two companies. q The abuse of law procedure (provided in Article L In order to determine whether a financing transac- 64 of the French Procedures Code), which allows the tion should be characterized as debt or equity, the FTA to disregard or disqualify a transaction (or a fi- French Tax Administration (FTA) and French courts nancial instrument), provided that they can prove generally analyze the characteristics of the instru- that either the transaction is fictitious or that it is ments by referring to the French commercial law and looking for a literal application of the law contrary

22 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 to the objectives of the authors of the law, and the only motive 3. Besides the determination of whether a of the transaction is tax avoidance; transaction’s interest rate is at arm’s q Article 212-1.a of the FTC, which sets a limit on interest de- length, what other factors does your ductibility as the higher of the two limits below: country consider in deciding whether the / The interest rate stated in Article 39-1-3° of the FTC, deter- related party financing is arm’s length mined by a reference to the annual average of the rates and acceptable overall? Examples of used by the credit institutions and published by the FTA. additional factors may include: The applicable rate for the last two FYs was 1.64% for the first quarter of FY 2018. contractual terms, functions of the In practice, these rates, when applicable, are largely akin to companies involved, characteristics of the safe harbor rules, particularly when the French party is the bor- companies’ financial products or services, rowing party in the financing transaction. economic circumstances, or business / ‘‘Market’’ interest rate. strategies. In practice, the FTA will usually comply with the OECD Transfer Pricing Guidelines, to determine ‘‘arm’s length’’ or Most often, in order to determine the arm’s length nature of the ‘‘market’’ rates. financing policy and/or the related party financing transactions of a company, the FTA seeks to ascertain that the interest rate Should the FTA challenge the deductibility of all or part of for the financial instrument is in line with the other terms and the interest expenses, it will bear the burden of proof and will conditions of the instrument and the economic risk conveyed have to demonstrate the abnormality of the terms and condi- by the instrument. Using a loan as an example, the FTA is likely tions of the challenged financing (except under the very specific to consider the factors below: conditions of an ‘‘abuse of law’’ mentioned above). q Currency; Yet, based on case law from the French Supreme Tax Court q Maturity; 3 (Conseil d’Etat or ‘‘CE’’), it is often acknowledged that the FTA q Variable versus fixed interest rates; may not rely on Article 57 of the FTC to challenge financing q Amount of the loan (principal); policy, particularly the use of debt vs. equity. q Date of issuance of the loan; q Guarantees and covenants; 2. What rules or guidance exist in your q Seniority of the loan. country to determine the arm’s length In the future, particularly under the influence of the OECD, interest rate for a related party financing it is likely that the FTA will scrutinize more closely the terms and conditions of a particular financing instrument on a stand- transaction? alone basis, in addition to the principal purpose of such a trans- As mentioned previously, in practice, the FTA abides by the action, as well as the overall appropriateness of the financing OECD Transfer Pricing Guidelines and is often eager to use policy. It is likely that the following aspects will be further scru- tools or concepts developed or advertised by the OECD when tinized in the near future (loan example): q they are appropriate or helpful. Purpose of the loan; q Substance of the parties (e.g., the capability of the borrower Accordingly, in most circumstances, the Comparable Uncon- and/or the lender to commit to such transactions in terms of trolled Price (CUP) method (when appropriately used) would functional decision making); be favorably considered by field auditors. q Options realistically available to the parties; Often, the application of the CUP method for loans will rely q Consistency with general practices in the industry (e.g., gear- upon: (i) the credit rating of the borrower and (ii) the determi- ing ratio of independent parties, etc.); nation of an arm’s length interest rate corresponding to this q Relationship of the transfer pricing policy to the financing rating. From this perspective, a number of auditors are famil- and non-financing transactions (i.e., possible joint consider- iar with analyses using authoritative capital markets database ation of both financing and non-financing transactions, as sources, including, Bloomberg, Reuters, or Loan Connector, part of the ‘‘transaction delineation’’ process). among others. It is possible that this type of analysis would be further 4. If it is determined that any part of a supplemented by a consideration of the borrowing conditions related party transaction should not be of the borrower with third parties. Such an analysis would re- characterized as debt, what are the quire appropriate adjustments, given the likely differences in comparability (maturity, issuance date, seniority, amount, li- consequences to both the borrower and quidity, etc.) between the controlled and uncontrolled transac- the related lender? tions. If a related party transaction should not be characterized as However, please note that based on our experience, it is also debt but as equity, the main tax consequences would be that the often the case that certain field auditors specifically request income generated by this instrument would qualify as a divi- that the taxpayer provide formal offers by third-party banks dend instead of interest, with the following implications: (see the response to Question 5). q At the level of a French paying entity: dividends are not tax Finally, even in situations where the arm’s length rate can be deductible and are subject to a 30% withholding tax (poten- evidenced, the deduction of interest expenses can be limited by tially reduced by the applicable double tax treaty), while inter- one of six interest deduction mechanisms provided by the est payments are tax deductible (subject to limitations) and French tax legislation (in addition to the potential application not subject to any withholding tax; of the abnormal act of management theory and the abuse of q At the level of a French beneficiary: interest income is fully law procedure).4 taxable, while dividend income can be 95% tax exempt by

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 23 virtue of the French parent-subsidiary regime, which is appli- during this period. However, for the Court, this study was not cable when the French shareholder holds at least 5% of the sufficient since it did not specifically cover SNC Siblu itself. share capital (or 2.5% of the share capital and 5% of the Of equal concern are the latest decisions by the Administra- voting rights) of the paying entity for at least two years. tive Court of Paris.9 Notably, in the Studialis case in January 2018, the court confirmed the very strict position taken by the FTA with respect to an intragroup loan granted in a classic LBO 5. Are there any relevant court cases or tax in which part of the acquisition financing was made through rulings in your country dealing with the the issuance of bonds between 2008 and 2012, bearing interest transfer pricing of intercompany financing at 10%, which were subscribed by foreign-related parties. As transactions? evidence that this rate was arm’s length, the taxpayer was able to produce the following: Over the past years, French administrative courts have released (i) A loan offer from a bank for similar bonds bearing interest a number of cases dealing with the transfer pricing of inter- at 12%; company financing transactions. (ii) A statement from another bank certifying it had been con- Notably, in the recent General Electric case,5 the French Ad- tacted by the borrower during this period and that the rate it ministrative Supreme Court lay down the elements of apprecia- would have offered would have been between Euribor + 10% tion of the abnormal nature of the remuneration of intragroup and Euribor + 12% for the same financing; loans, as defined by Article 212 II of the FTC. The French Ad- (iii) A study by PWC confirming that the risk profile of the ministrative Supreme Court confirmed the approach under borrowing company became worse between 2008 and 2012 and which the intrinsic rating of the borrowing company must pre- showing that, given its characteristics, an arm’s length rate vail and affirmed that if the membership in a group can influ- would be between 8.32% and 11.68%; ence the credit rating (and therefore the applied interest rate), (iv) A study from ING on the rate applied between 2008 and this influence is not automatic and can only be determined 2012 on junior and PIK financing, again showing that in this from a detailed qualitative analysis of each of the factors taken case, the market rate would have been higher than 10%. into account in the valuation of the credit risk of the subsidiary. In spite of the evidence produced, the Court ruled that in the This decision confirms the solution adopted by the Adminis- absence of a firm offer from a bank, none of the evidence 6 trative Court of Appeal of Bordeaux in the Stryker Spine case, brought forward by the company proved for certain the rate which is directly based on Article 57 of the FTC and the arm’s that would have been applied by a non-related financial institu- length principle, instead of the abnormal act management tion. Consequently, the Court ruled that the company did not theory. demonstrate that the applied 10% rate was arm’s length. A number of recently released cases also deal with the evi- In light of the above, we see that administrative courts and dence to be provided by a taxpayer to demonstrate that the in- courts of appeal tend to be taking a very strict approach by pro- terest rate applied to an intragroup debt instrument is arm’s viding no other option for taxpayers to demonstrate the arm’s length. length nature of the rate applied to intragroup financing, other On this topic, the Administrative Court of Montreuil7 re- than requesting and obtaining a firm offer from a non-related cently reviewed the method applied by a taxpayer to demon- lender before lending any money to a related party, thereby strate that the interest rate applied to intragroup loans was adding to the French tax legislation which does provide such a arm’s length in the absence of a loan offer issued by a non- requirement. related financial institution. In order to justify the rate applied, Since all of these cases were lodged prior to the General Elec- the taxpayer split it into three components: the floating/fixed tric case in the French Administrative Supreme Court, we hope rate swap, the cancellation premium, and the line of credit. The that lower courts will take a more pragmatic and reasonable Court ruled in favor of the taxpayer because it found that the approach regarding the evidence to be provided by taxpayers to FTA was unable to demonstrate that the data used by the tax- support the interest rate applied to intragroup financing. payer was irrelevant or that the method applied was incorrect. It should be noted that in this case, the line of credit had been Julien Monsenego is a Partner in Tax Law at Gowling WLG in Paris; determined based on a third-party quote. Thibaud Boucharlat is a Senior Associate in Tax Law at Gowling WLG in 8 Paris; and Guillaume Madelpuech is a Principal in the Paris Transfer The SNC Siblu case, released on April 4, 2017, is another Pricing Practice at NERA. case on this topic, but it illustrates the difficulty for French tax- They may be contacted at: payers in providing evidence of the arm’s length nature of the [email protected] rates applied to intragroup financing. In this case released by [email protected] the Administrative Court of Appeal of Bordeaux in an LBO con- www.gowlingwlg.com text, the Barclays group granted a loan to Siblu Holding and [email protected] Siblu Finance. A part of these funds were lent back to SNC www.nera.com Siblu. Although the interest rate was the same as the one ap- plied by Barclays to Siblu Holding and Siblu Finance, the Court of Appeal of Bordeaux found that SNC Siblu did not demon- NOTES strate that the rate applied to the intragroup financing was 1 De facto control is characterized by a company owning 50% or arm’s length since it did not provide any external quotes specifi- more of the voting rights in another company. cally granted to it. Using a (very) strict application of the above- 2 Cf. French Administrative Supreme Court, SNC Immobilie`re mentioned General Electric case, the Court determined that the GSE, n°303560, 7 September 2009 and min. c/ Ste´ LVMH, company could not rely on the rate applied to its shareholders n°398271, 13 April 2018. to demonstrate the arm’s length nature of the interest, even 3 CE, Sect., December 30, 2003, rec. N°233 894, SA Andritz. though SNC Siblu also provided an external study by the 4 The interest rate restriction provided by Article 212, I-a of the French Association of Capital Investors (AFIC) as support that FTC; the ‘‘anti-hybrid’’ financing provision (Article 212- I-b, of the the applied rate was in line with the average rates granted FTC); the thin capitalization rules (Article 212, II of the FTC); the

24 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Carrez Amendment (Article 209-IX); the Charasse Amendment (Ar- 7 Administrative Court of Montreuil, March 30, 2017, No. 1506904, ticle 223 B); and the financial interest deduction cap (Article 212 bis BSA Company. of the FTC). 8 Administrative Court of Appeal of Bordeaux, SNC Siblu, 4 April 5 French Administrative Supreme Court, 9e et 10e ch., June 19, 2017, n°15BX01177. 2017, n° 392543, min.c/ Ste´ General Electric France. 6 French Administrative Supreme Court, September 2, 2014, No. 9 Administrative Court of Paris, 7 July 2017, n°1607683, Ste´WB 12BX01182, Stryker Spine Company. Ambassador and 30 January 2018, n°1707553, SAS Studialis.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 25 Germany Alexander Vo¨gele, Philip de Homont, and Georg Dettmann NERA Economic Consulting, Frankfurt

1. How does your country identify ibility of interest were based on debt-to-equity ratios. They have been replaced by the limitation of interest and adjust related-party financing 2 transactions? What is your country’s deductibility (Art. 4h of the Income Tax Code and Art. 8a of the Corporate Tax Code3). approach to determining whether the debt arising from a related- German transfer pricing guidelines do not make a party financing transaction should general distinction between valuation methods for in- bound and outbound finance transactions. However, be properly characterized as debt? the formal framework (beyond valuation aspects) can Debt-to-equity discussions dominated German field be significantly different between inbound and out- tax audits for many years, but lost importance due to bound transactions. On the one hand, the limitation the introduction of the new interest deductibility of interest deductibility (‘‘interest barrier’’/ rules. The new law on interest deduction applies only ‘‘Zinsschranke,’’ Art. 4h of the Income Tax Code and on interest expenses exceeding interest income plus Art. 8a of the Corporate Tax Code) only relates to 30% of earnings before interest, taxes, depreciation, German taxpayers. Outbound interest payments are and amortization (EBITDA) (Art. 4h of the Income formally limited, whereas no restriction is placed on Tax Code and Art. 8a of the Corporate Tax Code). interest payments to Germany. Escape clauses apply, for example, in cases where the Also, it should be noted that Article 1 of the German debt/equity ratio of the taxpayer is not lower than the Foreign Tax Act (Auszensteuergesetz) only opens the group ratio. Therefore, the question on equity infu- possibility to correct transfer pricing that has incor- sion is quite unusual these days in Germany. rectly led to an underreporting of the German tax The question to what extent a loan would have been base. Strictly speaking, this is not a distinction be- granted by an unrelated lender leads to the question of tween inbound and outbound transactions, but it does interest rates to be applied. Therefore, the compara- mean auditors could only make unfavorable bility of interest rates has to be checked. adjustments—either by decreasing the interest paid Generally speaking, the German field tax auditors by a German taxpayer, or by increasing the interest will not react if the loan from a foreign company is paid by a foreign entity. interest-free, because they are not obliged to audit the transfer prices in favor of the taxpayer. In practice, tax inspectors use similar methods to If no written agreement exists, there must be a dis- assess inbound and outbound transactions, although tinction between cases where oral agreements or they more frequently question the substance of for- memorandums exist and those where no agreements eign financing entities. The main exception is the at all exist. Only the latter cases may lead to the non- court ruling by the Lower Tax court of Munster (7 De- deductibility of interest expense in case of loans from cember 20164), which could be considered an attempt countries with which the tax treaty does not reflect the by the German tax authorities to challenge the pricing OECD Model Tax Treaty terms. of inbound inter-company loans.5 Since this decision would typically imply lower interest payments, tax in- 2. What rules or guidance exist in spectors more frequently try to apply it to cases where your country to determine the arm’s the German entity makes the interest payments. length interest rate for a related- Interestingly, German Controlled Foreign Corpora- party financing transaction? tion (CFC) rules6 mean financial transactions that have no direct relation to a German entity, but are Since the 1980s, Germany has had detailed rules on fi- conducted between foreign subsidiaries, can also be nancial transactions. scrutinized in Germany. In other words, German The Administrative Principles1 (‘‘Verwaltungsgr- transfer pricing rules can have an implication on undsa¨tze’’) enacted on 23 February 1983 deal with the transactions that are neither inbound nor outbound. determination of interest and of guarantee fees on the This is somewhat more important for financial trans- basis of the arm’s length principle, and are still in actions, since they are more frequently seen as ‘‘pas- force today. Several other rules on the general deduct- sive’’ income according to these rules.

26 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 3. Besides the determination of whether a The taxable income of the borrowing entity would be in- transaction’s interest rate is at arm’s creased by the respective reclassified interest expense and for the lending entity, additional withholding tax might become length, what other factors does your due. country consider in deciding whether the related-party financing is arm’s length and 5. Are there any relevant court cases or tax acceptable overall? Examples of rulings in your country dealing with the additional factors may include: transfer pricing of intercompany financing contractual terms, functions of the transactions? companies involved, characteristics of the companies’ financial products or services, Several court cases tried to determine the arm’s length charac- economic circumstances, or business ter of interest rates. Of these, the Federal Tax Court decisions taken on 28 February 19907 and 19 January 19948 were the strategies. most important cases. The 1990 court case determined the in- The German Administrative Principles (‘‘Verwaltungsgrundsa¨- terest rate by using the spread between the debit and credit tze,’’ para. 4) require taking into account what a third party rates of banks and tried to develop a system of functional analy- would have charged for a similar credit on the money or capi- sis and of a certain ‘‘mean.’’ This court decision was superseded tal market. Each case must consider the following: by the Organization for Economic Co-operation and Develop- ment (OECD) and also by national developments. 1. Credit level and period; Some state tax courts issued remarkable decisions, includ- 2. Type and purpose of the credit; ing, for example, the aforementioned ruling by the Lower Tax 3. Security and creditworthiness of the debtor (taking into ac- court of Munster (7 December 2016). count special terms, which third parties would also have That being said, many German taxpayers analyze functions granted to the debtor entity as a member of a group of com- and risks, and perform shadow ratings on the basis of Standard panies); & Poors, Moody’s, or Fitch, followed by CUPs from Bloomberg, 4. The currency of the credit, the exchange risks and chances, Thomson Reuters, and others. and any hedging costs; Federal field tax auditors often do not accept CUPs from 5. The refinancing costs of credits passed on; and banks because banks have other market conditions, functions, 6. Other circumstances of the granting of the credit, especially and cost structures than finance companies. Therefore, CUPs the capital market conditions. from banks, as well as bonds, have to be adjusted by taking into account such differences. These adjustments should be done in To estimate security and creditworthiness of the debtor, fur- the documentation of the taxpayer. ther considerations should be taken into account: Field tax auditors often question the role of finance compa- Firstly, liquidity aspects need to be considered. When liquid- nies. Can equity be attracted by the functions and risk-taking ity is needed, an intercompany loan is not as easy to resell, as a by the management of the finance company? Or do the operat- publicly traded bond would be (i.e., it is more difficult to sell a ing companies use the finance company as a common vehicle shareholder loan in the open market, when liquidity is needed, without its own entrepreneurial function? In such cases, field than it is to sell a market traded bond). Therefore, this lack of tax auditors will want to apply the external interest rate of the liquidity should be reflected in the interest rate and must be ad- finance company to the final operating company. justed for. Field tax auditors frequently question the right remuneration Secondly, aspects of (structural) subordination need to be of guarantees, which often leads to discussions about the dis- considered. In practice, internal loans tend to be subordinated tinction between explicit guarantees, implicit guarantees, and to external creditors (e.g., priority debt), leading to internal the ‘‘backing in the group.’’ debt being substantially disadvantaged. This structural subor- In general, such issues can be solved if the case is well pre- dination needs to be reflected in the interest rate applied. pared in the documentation of the taxpayer. Lastly, in cases where the comparable data obtained derives Dr. Alexander Voegele, Philip de Homont, and Georg Dettmann work at from loans denominated in a different currency, interest rates NERA Economic Consulting, Frankfurt. need to be adjusted for the fact that different interest rates They may be contacted at: apply to different currencies. [email protected] [email protected] [email protected] 4. If it is determined that any part of a http://www.nera.com related-party transaction should not be characterized as debt, what are the consequences to both the borrower and NOTES 1 Grundsa¨tze fu¨ r die Pru¨ fung der Einkunftsabgrenzung bei interna- the related lender? tional verbundenen Unternehmen. 2 If any part of a related-party transaction is not characterized as § 4h ESTG. 3 § 8a KStG. debt, it is re-characterized as equity. 4 13 K 4037/13. If it is characterized as equity, the interest expenses and the 5 It should be noted that the court’s decision was admitted to appeal corresponding admin and transaction costs are not tax deduct- by the German Federal Tax Court (I R 4/17). ible. 6 Hinzurechnungsbesteuerung, laid out in § 8 of the Auszen- If these costs are, for example, considered to be motivated by steuergesetz. the shareholding relationship, the corresponding income of the 7 BStBl. II 1990, pp. 649 et seq. recipient is deemed to be a hidden dividend distribution. 8 BStBl. II 1994, pp. 725 et seq.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 27 Hong Kong Jeffrey Wong and Irene Lee KPMG, Hong Kong

1. How does your country identify (i.e., any tax advantage). With the Hong Kong transfer and adjust related party financing pricing rules in place, it may no longer be tenable to have interest-free loans, particularly cross-border transactions? What is your country’s ones, as they could be considered as not being con- approach to determining whether cluded on an arm’s length basis. An interest element the debt arising from a related party would be expected for any similar loan transaction financing transaction should be with a third-party bank and, therefore, there may be a properly characterized as debt? need to impute an interest rate on interest-free loans. That said, if no tax benefit is achieved with respect As Hong Kong operates a territorial taxation system, to domestic loan transactions (e.g., due to both enti- from a Hong Kong Profits Tax perspective, determin- ties being subject to the same tax rate, neither entity ing the source of the relevant income (e.g., interest) is incurring losses, no interest deduction being taken, always the key. For non-financial institutions, the etc.), then it could be argued that interest-free loans in commonly used tests, as established by case law prin- such circumstances might be acceptable to the ciples, are the ‘‘provision of credit’’ test and the ‘‘opera- HKIRD. However, further clarifications are required, tions’’ test. For financial institutions, such as banks, as this is not entirely clear at the moment. one would look at the location of the initiation and We note that other tax authorities (e.g., Australia, funding of the loan when determining the source of the U.S., etc.) have been quite active in questioning the interest income. intra-group financing arrangements. Although the From a deductibility point of view, Hong Kong has HKIRD has not yet reached such a level, we expect strict interest deductibility rules. Apart from being in- they will take a more assertive stance on intra-group curred in the production of assessable profits, the in- financing going forward. However, at this moment, terest paid also needs to satisfy certain specific criteria there is no established market practice from the Hong before a deduction can be made. In addition, there are Kong transfer pricing perspective on determining also specific anti-avoidance rules in place that limit whether debt arising from a related party financing the amount of interest deduction for certain arrange- transaction should be characterized as debt. ments involving related parties. Such arrangements may include cases where the loans are secured by non-taxable income generating deposits (i.e., the se- 2. What rules or guidance exist in cured loan test) or where the interest paid ultimately your country to determine the arm’s flows back to the borrower. length interest rate for a related Along with the recently implemented Corporate party financing transaction? Treasury Centre incentive, Hong Kong also enacted specific rules for the deduction of interest incurred Taxpayers in Hong Kong will follow OECD ap- from an intra-group financing business. proaches when pricing intercompany financing trans- The Hong Kong transfer pricing legislation, in the actions – e.g., performing credit rating analyses and form of Inland Revenue (Amendment) (No. 6) Bill making appropriate adjustments to comparables. We 2017 (the ‘‘BEPS Bill’’), was enacted on July 13, 2018. expect that additional rules and guidance on related As the BEPS Bill has only been effective for about two party financing transactions will come out in DIPNs in months, Hong Kong taxpayers are still awaiting fur- the near future, especially given the OECD’s recent re- ther guidance from the Hong Kong Inland Revenue lease of the Discussion Draft on Financial Transac- Department (‘‘HKIRD’’), which is expected to be pro- tions in July 2018. vided via new Departmental Interpretation Practice That said, the BEPS Bill mandates implementation Notes (‘‘DIPN’’s) within the next 6–12 months. of the arm’s length principle as the fundamental trans- One of the key areas that may require additional fer pricing rule in Hong Kong. This empowers the clarifications from the HKIRD is intra-group financ- HKIRD to adjust profits or losses where a transaction ing. A common question among Hong Kong taxpayers between two related parties departs from the transac- is the acceptability of interest-free loans. Based on the tion that would have been entered into between inde- BEPS Bill, emphasis has been placed on whether pendent persons in cases in which this has created a there is a decrease in the group’s overall tax burden tax advantage.

28 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 A domestic related party transaction is exempt from the new 4. If it is determined that any part of a rules if the transaction: related party transaction should not be q is domestic in nature, characterized as debt, what are the q does not give rise to an actual tax difference, and consequences to both the borrower and q is not utilized for tax avoidance purposes. the related lender? If it can be demonstrated that the applied interest rate falls within an arm’s length range, Hong Kong taxpayers will have a At this moment, there is no established market practice or leg- good first line of defense in case of any queries from the islation from the Hong Kong profits tax and transfer pricing HKIRD. perspectives regarding the re-characterization of a related Subject to the application of the transfer pricing rules, the party debt. taxability and deductibility of the relevant interest should There have been public statements by the Hong Kong tax au- follow the prevailing rules. thorities that they would examine the legal rights and obliga- tions created by hybrid instruments, among other factors, to determine their nature. 3. Besides the determination of whether a transaction’s interest rate is at arm’s 5. Are there any relevant court cases or tax length, what other factors does your rulings in your country dealing with the country consider in deciding whether the transfer pricing of intercompany financing related party financing is arm’s length transactions? and acceptable overall? Examples of additional factors may include: We expect the HKIRD to take a more assertive stance on intra- contractual terms, functions of the group financing transactions going forward. When the HKIRD companies involved, characteristics of the does issue a new DIPN on intercompany financing transactions and/or when there are more audits focused on such transac- companies’ financial products or services, tions, Hong Kong taxpayers will have more precedents to economic circumstances, or business follow. strategies. At the moment, the HKIRD is focusing on the transfer pric- ing of intangibles-related transactions. We expect that the As mentioned above, Hong Kong taxpayers will follow OECD HKIRD will eventually turn their focus to intercompany financ- approaches when pricing intercompany financing transactions ing transactions and likewise further their understanding of (e.g., performing credit rating analyses and making appropri- such transactions. Hong Kong taxpayers will need to be ready ate adjustments to comparables). In particular cases, Hong to defend their related party financing arrangements when Kong taxpayers may also consider qualitative factors in sup- audit activity does pick up. porting the arm’s length nature of such arrangements – e.g., in substantiating why the applied interest rate may fall more Jeffrey Wong is a Senior Manager of Global Transfer Pricing Services, and toward the upper end or lower end of the range. Irene Lee is a Director of Global Transfer Pricing Services at KPMG in Hong Kong. It is important to note that the onus will be on the taxpayer They may be contacted at: to provide sufficient documentary evidence in substantiating [email protected] any of the tax positions taken, especially in light of the strict de- [email protected] ductibility rules for interest. kpmg.com/cn

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 29 India Rahul K. Mitra, Aditya Hans, Ashish Jain, Sourav Toshniwal, and Meera Kohli Dhruva Advisors LLP

1. How does your country identify Uncontrolled Price (CUP) method for the determina- and adjust related-party financing tion of arm’s-length interest rates on related-party loans, and other methods (e.g., the interest-saving and transactions? What is your country’s yield approaches) for the determination of arm’s- approach to determining whether length guarantee fees on related-party guarantees. the debt arising from a related- In the initial years of transfer pricing developments party financing transaction should in India, both taxpayers and revenue authorities ad- be properly characterized as debt? opted non-binding bank quotes for benchmarking in- tercompany financial transactions. As the acceptance The Indian transfer pricing regulations – under Sec- of bank quotes became increasingly difficult, coupled tion 92B of the Income Tax Act, 1961 (‘‘the Act’’) – pro- with a greater awareness of the need for a sophisti- vide a comprehensive definition of the expression cated approach to the benchmarking of financial ‘‘international transaction.’’ This expression relates to transactions, taxpayers and tax authorities shifted five broad groups, one of which is capital financing. toward a systematic approach. The adjustments for Capital financing is suggested to include long- and some of the financial transactions are discussed short-term borrowing and lending, guarantees, mar- below: ketable securities, advances, receivables, or any other i) Loans – The price of a loan transaction – i.e., the debt arising during the course of business. interest rate – typically comprises two components: (i) The regulations require every person (including the base rate and (ii) the credit spread. The bench- resident and nonresident multinational companies) mark rate of the underlying currency of the loan ar- who has entered into an international transaction rangement is considered the base rate. The credit with its group affiliates to file an annual compliance spread is the return to the lender for assuming the report, using Form 3CEB under Section 92E of the credit risk, and this is inversely proportional to credit Act. This annual compliance report lists all the inter- quality. The process of benchmarking a loan transac- national transactions that have been entered into by a tion typically commences with estimating the credit multinational company with its group affiliates rating of the borrower and mapping out the key terms during a particular fiscal year. The compliance report of the loan agreement. The arm’s-length interest rate does not offer any monetary threshold, and it is re- for a loan transaction is determined by the following quired to be filed with the tax department, along with steps: (1) evaluating the creditworthiness of the bor- the income tax return, by the prescribed filing date. rower on a stand-alone basis; (2) factoring in the im- The compliance report is the starting point for the rev- plicit support of membership of a multinational group enue authorities in identifying related-party financial (if any); and (3) identifying comparable uncontrolled transactions. transactions with borrowers that have a similar credit Further, the audited financial statements, which rating and similar terms in their loan agreements, companies prepare annually, also require the disclo- such as the currency in which the loan is made, the sure of any related-party transactions that have been country of the borrower, the tenure of the loan, and entered into by the taxpayer with its group affiliates, the guarantee and security on the loan (if any). The under relevant accounting standards. The revenue au- outcome of the above steps provides comparable loan thorities also peruse the audited financial statements arrangement information and an uncontrolled rate of in order to reconcile the disclosures that have been interest against which the transaction’s rate of interest made in the annual compliance report. is tested to determine whether any adjustments are The need for an adjustment arises in situations warranted. where the revenue authorities determine that the rate ii) Guarantees – The adjustments to guarantees are of interest on a transacted loan has not been applied more prevalent in situations where the guarantee was on an arm’s-length basis. The Indian transfer pricing extended by an Indian parent company to its foreign regulations have not prescribed any specific methods affiliate. In the initial years of transfer pricing in for the benchmarking of financial transactions. How- India, revenue authorities determined the arm’s- ever, as a matter of practice, both taxpayers and rev- length guarantee fee by applying the CUP method, pri- enue authorities have been applying the Comparable marily based on naked bank quotes. Over time and

30 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 with greater awareness of more sophisticated approaches, the (‘Tribunal Court’) in which the Tribunal Court has focused on a revenue authorities now tend to utilize the interest-saving and borrower’s apparently limited ability to borrow at arm’s length, yield approaches in determining the applicable arm’s-length in order to test whether the borrower could have taken a lesser guarantee fee. Under the interest-saving approach, the rate of sum or nothing. interest on guaranteed loan transactions is compared to the Generally speaking, Indian revenue authorities today do not rate of interest on similar unguaranteed loan arrangements in test the amount that a borrower would have been able to order to determine the interest that is saved. The approach to borrow on its own in order to determine whether it should dis- determining the rate of interest on unguaranteed loan arrange- regard the guarantee for the issues, such as an increase in the ments is similar to determining the rate of interest on similar level or the extent of the overall debt due to the guarantee. uncontrolled loan arrangements, as discussed above. The However, there have been a few rulings which provide that the amount of interest that is saved is attributed as the guarantee appropriate analysis of the facts and circumstances of financ- fee. The revenue authorities also analyze the difference be- ing arrangements is needed to determine whether a loan could tween the credit ratings of the parent company in India and the be considered a quasi-equity infusion or whether a guarantee foreign subsidiary, as well as the corresponding credit spread could be regarded as a shareholder service. Furthermore, it is or rate of interest on the Indian bonds, in order to determine anticipated that, with the passage of time, a more sophisticated the arm’s-length guarantee fee. approach to the benchmarking of loans and guarantees will be iii) Outstanding receivables or advances – The adjust- adopted, with the result that the issue of proper characteriza- ments to outstanding receivables or advances are linked to the tion of related-party financing, in addition to the credit rating primary transaction between an Indian taxpayer and its foreign evaluation exercise, and comparable loan searches, will be con- affiliate. Where the outstanding receivables are determined to sidered part of the standard audit process. be of a non-arm’s length nature (for instance, when it is deter- The following points are relevant when undertaking the mined that an undue advantage is being provided to the related proper characterization of related-party financing: party by prolonging the recovery), the revenue authorities con- q The use of the funds by the borrower to invest in fixed assets siders such receivables to be interest-free loans or advances. of a long-term nature, for use as the core assets of the busi- The interest computation for such outstanding receivables fol- ness of the borrower, may be a factor indicating that the lows the same approach as the interest determination for loan funds are the equivalent of equity; transactions. q Where the ratio of debt to equity is very high compared to iv) Hybrid instruments – Financial instruments, such as the average for an industry or in the country in which the in- preference shares, optionally convertible preference shares/ vestment is made, this may be an indication that a part of the debentures, and compulsory convertible preference shares/ debt may be a substitute for equity; debentures, are considered hybrid financial instruments and q If the circumstances of the borrower are such that an inde- are used by related entities of cross-border Multinational En- pendent lender would not have provided the desired credit to terprises (MNEs) to achieve their financial objectives. A hybrid that borrower where, for instance, the borrower has a severe instrument is a financial asset that has the features of two dif- liquidity crunch, has had negative cash flows in the past and ferent financial instruments, i.e., debt and equity. The first step likely in the near future, or finance is required for a very high- in undertaking a transfer pricing analysis of a hybrid instru- risk project like exploration, etc.; ment is to appropriately analyze the features of the instrument q Conditions regarding the repayment of the loan that are con- and to assign weight to its debt and equity features. One refer- sistent with those for an equity investment, such as subordi- ence for how the weights are to be assigned could be drawn nated rights for loan recovery or a loan repayment that is from the ways in which leading rating agencies would evaluate linked to the financial performance of the borrower, would be such hybrid instruments.1 Once the weights for the debt and a factor indicating that the loan might be a substitute for equity have been assigned, the next step involves determining equity; the arm’s-length interest rate on the debt, following the prin- q Analyzing whether the rights and obligations of the provider ciples of vanilla loan benchmarking, and then evaluating the of the funds are similar to the rights and obligations of a cost of equity by following the capital asset pricing model. At shareholder – for example, the lender may have (in relation to the end of the process, the arm’s-length price of the hybrid in- the loan) voting rights, a return dependent upon profits, or strument can be determined by computing the weighted aver- other rights that usually attach to ownership; age price of the debt and equity. The revenue authorities have yet to adapt this sophisticated way of benchmarking the hybrid q Investment regulations that are applicable in a particular instruments. However, it is vital to analyze the arm’s-length country may require an investor to maintain the flexibility of pricing, as such instruments may provide a tax advantage posi- their investment, such as where there are barriers to the repa- tion to the MNE – by claiming the payment on the hybrid in- triation of equity in the country of residence of the recipient strument as a tax-deductible expense in the borrower’s of the funds, or where a country imposes a minimum share- jurisdiction and then treating the income as tax-free dividend holding requirement by domestic investors. In these cases, income in the lender’s jurisdiction, for instance. contributions that are the equivalent of equity may be made With respect to the proper characterization of related-party in the form of loans in order to ensure that the percentage of financing, there are no specific provisions under the Indian the shareholding of the domestic investors is not diluted. transfer pricing regulations that focus on examining the genu- While the above points are relevant for analyzing whether the ineness of a loan made by a related party and the consideration debt can be considered quasi-equity, it is also vital to analyze of the same as a substitute for equity, or vice versa. However, situations where the lender lacks the capability to control the the Indian Revenue introduced provisions of general anti- risk associated with the investment in a financial asset and avoidance rules (GAAR), effective from the fiscal year com- should therefore be entitled to nothing more than a risk-free mencing April 1, 2017, which empower Revenue Officers to re- rate of return so that the residual difference between the arm’s characterize equity into debt or vice versa, as a consequence of length rate of return and the risk-free rate of return would be an impermissible avoidance arrangement. Furthermore, there allocable to the party exercising control over the investment have been a few rulings by the Income Tax Appellate Tribunal risk.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 31 As already highlighted, no specific guidelines for analyzing related-party financing transaction. The guidelines provided related-party financial transactions currently exist, and Tribu- under Section 92C, which deal with the computation of the nal Courts have largely relied on OECD transfer pricing guide- arm’s-length price, are also applicable to financing transac- lines in adjudicating several transfer pricing issues, including tions. As stated earlier, the CUP method is generally preferred financial transactions. The draft of the OECD transfer pricing for determining the arm’s-length interest rate for related-party guidelines on financial transactions have highlighted situations in which debt can be considered equity and whether the lender loan transactions, and the other method (the interest-saving has the ability to bear financial risks. Once the final transfer approach) is generally used to determine the arm’s-length guar- pricing guidelines are issued by the OECD, it is likely that the antee fee. A brief discussion of the application of the CUP Tribunal Court would rely upon these while adjudicating the method and other methods was provided in response to Ques- issues involving financial transaction characterization and tion 1. benchmarking. In addition to the above, there are safe harbor rules that have 2. What rules or guidance exist in your been prescribed by the Indian revenue authorities. The Central country for determining the arm’s length Board of Direct Taxes has issued revised safe harbor guidelines, interest rate for a related-party financing which prescribe interest rates for outbound loans that are de- transaction? nominated in the Indian currency and guarantee rates for fi- nancial transactions. The safe harbor rates that have been The Indian transfer pricing regulations do not provide any spe- prescribed for FY 2016-17 to FY 2018-19 are provided below for cific guidelines to determine the arm’s-length interest rate for a reference purposes:

Eligible Applicability Basis CRISIL2 Credit Rating of the Borrower International Points Transaction Advance of an intra- The interest rate in re- 150 Between AAA to A or its equivalent; group loan to a non- lation to the interna- resident wholly- tional transaction is 300 BBB-, BBB, or BBB+ or its equivalent; owned subsidiary, not less than the one- provided that the year marginal cost of 450 Between BB to B or its equivalent; loan is denominated funds lending rate of in Indian Rupees. the State Bank of 600 Between C to D or its equivalent; India, as of April 1 of the relevant previous 400 If the AE credit rating is not available and the year, plus cumulative value of the loan being advanced to all AEs does not exceed 1 billion Indian Rupees as of March 31 of the relevant previous year. Advance of an intra- The interest rate in re- 150 Between AAA to A or its equivalent; group loan to a non- lation to the interna- resident wholly- tional transaction is 300 BBB-, BBB, or BBB+ or its equivalent; owned subsidiary, not less than the one- provided that the year marginal cost of 450 Between BB to B or its equivalent; loan is denominated funds lending rate of in foreign currency. the State Bank of 600 Between C to D or its equivalent; India, as of April 2 of the relevant previous 400 If the AE credit rating is not available and the year, plus cumulative value of the loan being advanced to all AEs does not exceed 1 billion Indian Rupees as of March 31 of the relevant previous year.

For the provision of a corporate guarantee by an Indian (2017) (the ‘‘Practical Manual’’). In paragraph D.3.12.4 of the parent entity in favor of a wholly-owned foreign subsidiary Practical Manual, it is acknowledged that revenue authorities company, the safe harbor regulations prescribe a minimum face challenges when scrutinizing the arm’s length price of guarantee commission of 1% per annum on the amount of the related-party financial transactions due to the non-availability guarantee extended, provided that the credit rating of the bor- of specialized databases and comparable transfer prices for rower, as determined by an agency registered with the Securi- cases involving complex intercompany loans, and mergers and ties and Exchange Board of India, is of adequate to highest acquisitions that involve complex intercompany loan instru- safety. ments, as well as the implicit element of guarantee from the In addition, the Indian Revenue has also set out its approach parent company in securing debt. However, it has been ob- to dealing with the determination of arm’s length pricing for served that sophisticated benchmarking approaches that related-party financial transactions in the United Nations Prac- follow global best practices have been acknowledged by Tribu- tical Manual on Transfer Pricing for Developing Countries nal Courts when adjudicating the issue of TP adjustments.

32 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 3. Besides the determination of whether a 5. Are there any relevant court cases or tax transaction’s interest rate is at arm’s rulings in your country dealing with the length, what other factors does your transfer pricing of intercompany financing country consider in deciding whether the transactions? related-party financing is at arm’s length Most of the judicial precedents in India have dealt with the de- and acceptable overall? Examples of termination of the arm’s-length interest rate or guarantee fee, additional factors may include: and few of the rulings have dealt with the issue of the appropri- ate characterization of the financial transaction. However, as contractual terms, the functions of the the awareness of the appropriate characterization of the finan- companies involved, the characteristics of cial transaction has increased, judicial precedents now exist the companies’ financial products or which examine the need to look beyond the legal form of the services, economic circumstances, transaction and evaluate the facts and circumstances of the ar- rangement in order to determine whether the financial arrange- or business strategies. ment needs to be dealt with in its legal form. Some of the relevant case excerpts are highlighted below: As stated earlier, the Indian transfer pricing regulations do not Tega Industries Limited [TS-780-ITAT-2016(Kol)-TP] provide any specific guidelines for evaluating related-party fi- 4.4. We noticed that the subsidiary company has low capital, nancing transactions from an arm’s-length perspective. In that is, share capital of Rs. 23 lacs; therefore, without injecting some of their rulings, the Tribunal Courts in India have consid- the funds it was not possible for the subsidiary company to run ered the overall scheme of the arrangement and evaluated the the business for the benefit of the holding company and the entire commercial arrangement between the lender and the borrower group. Therefore, the loan injected by the holding company to its from the perspective of how independent parties would have subsidiary company is a kind of quasi-equity, i.e., in the form of been dealt with in similar conditions. This issue is discussed in a loan. . . detail in the response to Question 1, above. 5.4. As the assessee’s expectations from the provision of the loan and guarantee are not those of a lender or a guarantor, i.e., to earn a market rate of interest or a guarantee fee, but, rather, the 4. If it is determined that any part of a expectation was that of a shareholder to protect its investment in- related-party transaction should not be terest, to help it to achieve its acquisition of Tega Beruc for the fur- therance of its own business and to get a return in terms of the characterized as debt, what are the investment’s appreciation in value and dividends. It can be veri- consequences to both the borrower and fied from the fact that no third party would have agreed to grant the related lender? loans on an independent basis to the tune of Rs. 5 crs to Tega Ba- hamas, given its skewed debt-equity ratio that is reflected on the Our response to Question 1 covered this issue extensively. balance sheet, where equity funding is mere Rs. 23 lacs. There- fore, in the present case, the guarantee is a shareholder activity. . . In an inbound loan scenario, where it is determined that the Ucal Fuel Systems Ltd vs. ACIT [1519/Mds/2015] financial transaction should not be characterized as debt, inter- 46.The party to which the loan was advanced by the assessee est deductions in the hands of the Indian borrower would be here was not only a subsidiary but also one whose capital stood denied, while the lender would continue to reflect interest completely eroded, and which was suffering continuous losses. income in its books of accounts. No banker would have advanced any sums to such a company, since the risk would have been too much. Thus, the only source In an outbound loan scenario (here, generally the taxpayer for such a subsidiary to raise any funds was its principal alone. . . claims that the debt provided to its related party is performing Thus, finding a comparable uncontrolled transaction, where a an equity function, thereby warranting no charges), where it is loan was given to an entity which was subsidiary to the tested determined that the loan is a substitute for equity, then the party, and whose capital stood completely eroded due to loss was Indian lender would not be required to charge interest on the not practical or feasible. The simple reason is that no other person loan. In cases where the Indian lender has not charged interest would have given any loan to such an entity, whatever might be in the first place, where it is claiming that the debt is perform- the interest rate, since the chances of recovery were negligible . . .In our opinion, the question of benchmarking the transaction ing an equity function, and where it has been determined that of the nature mentioned, and applying any of the methodology the debt cannot be considered quasi-equity in light of the facts prescribed in sec.92C(1), did not arise at all due to the particular and circumstances of the case, then there would be an interest facts and circumstances. imputation at the hands of the Indian lender, while no corre- Soma Textiles & Industries Ltd. vs. ACIT - [(2015) 154 ITD sponding interest charge would be necessary for the related- 745 (Ahd) party borrower. 9. The expression ‘‘quasi-capital,’’ in our humble understand- It is certain that where a contrary position is determined by ing, is relevant from the point of view of highlighting that a quasi- capital loan or advance is not a routine loan transaction the revenue authorities in relation to the position determined simplictor. The substantive reward for such a loan transaction is by the appellant, economic double taxation would arise for the not interest but the opportunity to own capital . . . References MNE group. There exists no provision for providing corre- have been made to the advances being in the nature of ‘‘quasi- sponding relief to the other party in the financial transaction. capital’’ . . .in which (a) advances that were made as capital could However, the MNE group could explore the Mutual Agreement not be subscribed to due to regulatory issues, and the advancing Procedure (MAP) to resolve the issue of economic double taxa- of loans was only for the period until the same could be converted tion. into equity, and (b) advances were made for subscribing to the

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 33 capital, but the issuance of shares was delayed, even if not inordi- - Business Risk: The lender’s view of the industry in which the nately. Clearly, the advances in such circumstances were materi- debtor operates its business is taken into account; and ally different than the loan transactions simplictor, and that is - Structural Risk: The qualifications of external ratings agen- what was decisive so far as the determination of the arm’s length cies that have been awarded to the debtor are weighed. price of such transactions was concerned. Tata Autocomp Systems Limited vs. The ACIT, Cir. 2(3), Lanco Infratech Limited vs. DCIT –TS-328-ITAT- Mumbai 2017(HYD)-TP Consequently, the TPU held that it would be more relevant to 9. It is a well-accepted practice that the construction industry see how the assessee would have behaved in an uncontrolled pays advances at a certain percentage of the contract value to mo- transaction like this between unrelated parties, and whether inter- bilize various resources for the execution of the contract, and est would have been charged, taking into account the creditwor- these advances are given in the regular course of business. As seen thiness of the AEs, the margins, and security, or any other from the facts of the assessee’s case, the assessee is undertaking an considerations that are relevant for deciding the financial sol- EPC contract and has received mobilization advances as part of vency of the borrower. that. Likewise, the assessee has given some work to other parties, Asst. Commissioner of Income Tax 11(1) vs. M/s Nimbus on a sub-contract basis, and it necessarily has to provide mobili- Communications Ltd. zation advances to these parties. It is also noticed that the as- The ld. CIT(A) decided this issue vide para . . .which reads as sessee has advanced mobilization advances to both AEs and non- under . . .It is pertinent to note that for the factors that have been AEs and that no interest has been charged from either party . . . considered by Banks while providing loans/bank guarantees, Cadila Healthcare Limited vs. ACIT - TS-241-ITAT- there are various alternative factors that could be considered by 2017(Ahd)-TP the banks, which are listed below: 12. It is thus quite clear that the considerations for extending a q credit rating/risk profile of the recipient of the guarantee; loan simplictor are materially distinct and different from extend- q the financial position of the entity; ing a loan which is given in consideration for, or mainly in con- sideration for, the option to convert the same into capital on q the terms of the guarantee, such as provision of security, etc.; certain terms which are favorable vis-a`-vis the terms available or, q the amount of guarantee provided; to put it more realistically, hypothetically available to an indepen- q the period that the guarantee has been provided for; dent enterprise. On a conceptual note, the entire purpose of the q the past history of the customer, i.e., whether the customer has exercise of the determination of the arm’s length price is to neu- previously made any defaults in the repayment of principle/ tralize the impact of the intra-AE relationship in a transaction, interest; meaning that the right comparable for such a transaction of q market dynamics and competition; quasi-capital is a similar transaction of lending money on the q same terms, i.e. with an option to convert the loan into capital on the margins recovered by the bank over its own overheads; and materially similar terms. However, what the authorities below q the negotiation and relationship with banks have held, and wrongly held for that reason, is that a quasi-capital Glenmark Pharmaceuticals vs. Addl CIT transaction like the one before us can be compared with a simple From the above orders of the Tribunal, it is adequately clear loan transaction where the sole motivation and consideration for that the ‘naked quotes’ of the bank guarantee commission rates the lender is the interest on such loans . . . that are displayed on the websites of the banks should not be ap- Furthermore, in the earlier years of transfer pricing, most of plied in the TP studies without adjustments to various factors of the judicial precedents in India addressed situations where the the transactions. These factors may be risk-related ones, time- taxpayers had adopted bank quotations or rates available on related guaranteed amounts, the financial strength of the AEs, the bank websites as means of comparison. The systematic ap- background of the customers, and the relationships of the AEs proach to benchmarking financial transactions, which involves with the parental companies, etc. . . . an estimation of creditworthiness and the identification of The above observations highlight the fact that understanding comparable loan transactions, has yet to be adopted by the the economic circumstances and terms of the transaction, in- Indian judicial authorities in a full-fledged way, even though cluding the commercial aspects of any intercompany loans, is there have been comments in some of the rulings, suggesting a of the utmost importance. When determining an interest rate, systematic approach. following the best global practices, the credit rating of the bor- As previously mentioned in response to Question 2, the rower needs to be established (either by using commercial Indian revenue and judiciary authorities have attempted to credit rating tools or guidance from the ratings agencies), and adopt the best practices but were unable to make much head- a comparability analysis needs to be undertaken, either by way due to the ad hoc assumptions that they would have had to searching for third-party comparables (using global databases, undertake in the absence of adequate skill sets and tools. Even such as Thomson Reuters’s LoanConnector, or Bloomberg, or so, this highlights the keenness of the Indian revenue and judi- Indian databases such as NSDL and CDSL) or using an internal ciary to move toward a more sophisticated approach. Extracts comparable (if available), with reference to the terms of the from some of these key rulings are provided below: related-party financial transaction. Hinduja Global Solutions Ltd. vs. Addl CIT, Circle 6(3), Mumbai Rahul Mitra is a Partner at Dhruva Advisors LLP; Aditya Hans is a Partner The Transfer Pricing Officer was of the opinion that . . . in this at Dhruva Advisors LLP; Ashish Jain is a Senior Associate at Dhruva regard, the financial institutions generally weigh four elements in Advisors LLP; Sourav Toshniwal is a Senior Associate at Dhruva Advisors determining whether or not to issue loans: LLP; and Meera Kohli is a Consultant at Dhruva Advisors LLP. They may be contacted at: - Financial Risk: It is based on the debtor’s financial position by [email protected] taking into consideration the Balance Sheet and Income State- [email protected] ment; [email protected] - Credit Risk: The availability of guarantees, the purpose of the [email protected] loan, the loan’s term, and the maturity period of the loan are taken [email protected] into consideration; www.dhruvaadvisors.com

34 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 2 CRISIL is a global analytical company providing ratings, re-

NOTES search, and risk and policy advisory services. CRISIL’s majority 1 Next Generation Hybrid Securities, Anna Pinedo, [Wall Street shareholder is Standard & Poor’s. Lawyer, May 2006, Vol. 10, No. 5].

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 35 Ireland Catherine O’Meara Matheson, Ireland

1. How does your country identify This provision, however, does not apply to certain fi- nancing companies availing of the section 110 TCA and adjust related party financing 3 transactions? What is your country’s regime. (iii) Securities issued by an Irish company and held approach to determining whether by a non-resident related company.4 However, there the debt arising from a related party are extensive exemptions to this provision where the financing transaction should be interest is paid to a related company in an EU properly characterized as debt? Member State or a double tax treaty partner country, or by certain Irish resident finance companies when Broadly, the characterization of a related party financ- the interest is at a reasonable commercial rate.5 ing transaction will follow its form, save for Ireland’s In addition to the re-characterization provisions, rules on the re-characterization of certain interest Ireland has an extensive body of anti-avoidance legis- payments as distributions (discussed in further detail lation that limits the deductibility of interest pay- below). There are also significant anti-avoidance rules ments in the context of intragroup transactions and in relation to the deductibility of interest on related where such payments are not made for bona fide com- party financing transactions. mercial purposes. Ireland’s transfer pricing rules, provided under Part Separately, the EU Anti-Avoidance Tax Directive 35A of the Taxes Consolidation Act 1997 (‘‘TCA’’), re- (‘‘ATAD’’) is set to introduce fixed-ratio interest limita- quire transactions between associated persons under- tion rules for Ireland, which will operate to deny a de- taken in the course of trading activities to be at arm’s duction in respect of net interest expense (gross length. Irish transfer pricing legislation specifically interest expense less interest income) that exceeds provides that the transfer pricing rules should be con- 30% of the taxpayer’s EBITDA.6 The limitations pro- strued in accordance with the 2010 OECD Transfer vided under ATAD can be applied on an entity-by- Pricing Guidelines for Multinational Enterprises and entity level or at the group level. There is, however, Tax Administrations (the ‘‘OECD Guidelines’’). The scope for a grandfathering of loans agreed on before 2017 edition of the OECD Guidelines have not been June 17, 2016, and a de minimis exemption of up to a incorporated into Irish domestic law to date. a3 million net interest expense will apply. With respect If an arrangement between associated entities is not to the implementation of the interest limitation rules, at arm’s length, then an adjustment may be made to Ireland is availing of derogation such that the rules the Irish company’s profits. Such an adjustment will will be effective from January 1, 2024 unless they are only be made where, as a result of a trading transac- introduced as a minimum standard by the OECD Mul- tion, the income is understated or, alternatively, ex- tilateral Instrument in the interim. penses are overstated. Ireland’s transfer pricing rules do not apply to transactions that are not conducted for trading purposes. 2. What rules or guidance exist in Regarding the appropriate characterization of debt, your country to determine the arm’s Ireland has no specific thin capitalization rules or re- length interest rate for a related quirements for a minimum debt-equity ratio. Never- party financing transaction? theless, Irish tax legislation, under section 130 TCA, can operate to reclassify interest as a distribution and There are no specific legislative rules for related party disallow the appropriate tax deduction where interest financing transactions; rather, if the transaction falls is paid on securities, which are: within the scope of the transfer pricing rules as a trad- (i) Securities issued other than for new consider- ing activity of the company, the general transfer pric- ation or that are convertible directly or indirectly into ing legislation will apply. The Irish transfer pricing shares;1 rules apply so as to ensure that an arm’s-length inter- (ii) Securities where the interest paid is to any est rate is charged, subject to the proviso that an ad- extent dependent on the company’s results or is more justment will only be made where the Irish company than a reasonable commercial rate. Where the interest has understated income or overstated expenses. is paid above a commercial rate, the excess interest Revenue have not published specific guidance on over the commercial rate is treated as a distribution.2 how to determine an appropriate arm’s length interest

36 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 rate or a reasonable commercial return. The transfer pricing tax law through section 130 TCA, is outlined in the answer to rules state, ‘‘[F]or the purposes of this section the ‘arm’s-length Question 1, above. The effect of the provision is to reclassify amount’ for an arrangement is the amount of consideration certain interest payments as distributions, which gives rise to that independent parties would have agreed for the arrange- alternative tax considerations. ment had those independent parties entered into that arrange- Borrower ment.’’ As noted above, taxpayers should determine the arm’s The primary disadvantage is that the payment of interest that length amount while taking into account the OECD Guidelines. is re-characterized under section 130 TCA will not give rise to a Presently, the legislation refers to the 2010 Guidelines, but it is tax deduction. The payment, for tax purposes, is treated as the anticipated that updates to the OECD Guidelines, including payment of a distribution, and the related withholding tax con- any guidance relating to the pricing of financing transactions, siderations apply as if it were the payment of a distribution will be adopted in due course. rather than interest. 3. Besides the determination of whether a Lender transaction’s interest rate is at arm’s On the basis that the payment is reclassified as a distribution, the payor may be required to withhold a percentage of the pay- length, what other factors does your ment unless certain administrative withholding tax require- country consider in deciding whether the ments are in place. If withholding tax arises, the lender will related party financing is arm’s length receive payments net of dividend withholding tax. and acceptable overall? Examples of additional factors may include: 5. Are there any relevant court cases or tax contractual terms, functions of the rulings in your country dealing with the companies involved, characteristics of the transfer pricing of intercompany financing companies’ financial products or services, transactions? economic circumstances, or business strategies? As Ireland has only relatively recently introduced transfer pric- ing legislation, there are no litigated cases or rulings on the Typically, Revenue will apply an OECD principles-based ap- transfer pricing of intercompany financing transactions. From proach to transfer pricing matters. An arm’s length interest rate a practical perspective, given Ireland’s extensive anti-avoidance can be determined by performing an appropriate comparabil- rules and the re-characterization provisions outlined above, the ity analysis. The typical process outlined in Chapter III of the focus of Revenue’s inquiries on the payment of intragroup in- 2010 OECD Guidelines should be appropriate in this regard. terest would be on whether a deduction is available in the first The issues that are particularly important in the context of place, rather than on the quantum of the interest. That said, interest include: where a deduction for interest is properly taken, Irish Revenue (i) Considering the period to be covered (term); will look for appropriate benchmarking support as evidence (i) Understanding the taxpayer’s circumstances (industry, that the interest rate is arm’s length. risk profile, etc.); (ii) Understanding the transactional and functional analysis; Catherine O’Meara is a Partner at Matheson in Dublin and may be (iii) Identifying internal or external comparables; and contacted at: (iv) Applying the comparable uncontrolled price method [email protected] (‘‘CUP’’) and comparability adjustments. http://www.matheson.com

4. If it is determined that any part of a NOTES related party transaction should not be 1 Section 130 TCA. characterized as debt, what are the 2 Section 130(2)(d)(iii) TCA. consequences to both the borrower and 3 Section 110(4) TCA. the related lender? 4 Section 130(2)(d)(iv) TCA. 5 The re-characterization of a related party transaction such that Section 130(2B) and 452 TCA. the payment is not considered debt, generally triggered in Irish 6 Earnings before interest, tax, depreciation, and amortization.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 37 Israel Yariv Ben-Dov Lion Orlitzky & Co. – Moore Stephens Israel

1. How does your country identify 2. What rules or guidance exist in and adjust related party financing your country to determine the arm’s transactions? What is your country’s length interest rate for a related approach to determining whether party financing transaction? the debt arising from a related party financing transaction should be The Israeli Transfer Pricing Regulations are stipulated under section 85A of the Israeli Tax Ordinance. These properly characterized as debt? regulations do not relate specifically to an intercom- pany financial transaction, but they are general rules A taxpayer in Israel who is performing transactions for assuring compliance with the arm’s-length prin- with related parties (as defined in the regulations) ciple. However, memos issued periodically by the ITA must submit a special form (1385) along with its tax do relate to this matter, as do court decisions. returns. In this form, the taxpayer must detail all transactions with its related parties, including finan- cial transactions. For instance, regarding an inter- 3. Besides the determination of company loan transaction, the taxpayer must disclose the parties (borrower/lender), the amount of the loan, whether a transaction’s interest rate the interest that was determined, and the transfer is at arm’s length, what other factors pricing method used with each specific transaction. does your country consider in The taxpayer then declares that this transaction (as deciding whether the related party with any other intercompany transaction) was con- financing is arm’s length and ducted in accordance with the Israeli Transfer Pricing acceptable overall? Examples of Regulations and that the taxpayer has enough docu- mentation to support it. As such, when conducting a additional factors may include: transfer pricing audit, the Israeli Tax Authorities contractual terms, functions of the (‘‘ITA’’) have information about the financial transac- companies involved, characteristics tion. In addition, during the audit the ITA will request of the companies’ financial products additional materials, such as transfer pricing docu- or services, economic mentation, financial statements, etc. These materials contain information about the financial transaction, circumstances, or business as well. strategies.

During the audit, if the ITA conclude that the finan- The ITA’s approach would be to conduct a full func- cial transaction (such as a loan, factoring in days of tional analysis, as well as an industrial analysis in credit, etc.) has not been conducted according to the order to get a perspective of the whole ‘‘picture,’’ in- arm’s-length principle, the ITA will claim that this cluding: the nature of the financial transaction, its transaction is in fact different from the way it was purpose, a comparison to the market, economic characterized by the taxpayer and therefore should be status, functions, assets, risks, contractual terms, and treated accordingly, for example, as a dividend. a comparison with third-party transactions (e.g., banks). The ITA would also require proof that the In a recent case, the ITA examined the taxpayer’s fi- tested intercompany transaction has an economic and nancial documentation (such as accounts payable and legal rationale and substance, meaning that it was accounts receivable) and informed the taxpayer that logical to perform this transaction instead of perform- they concluded that his or her terms of payment with ing it with a third party or not performing it at all. related parties lasted more than a year, while the terms of payment with third parties were 90 days (on As such, an economic analysis that only deals with average). As such, the ITA determined an interest rate a demonstration that the intercompany interest rate is (based on the regulations) that would apply for the at arm’s length may be insufficient in assessing the difference between those terms of payment and issued transaction as being acceptable, from a tax perspec- a tax assessment accordingly. tive.

38 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 4. If it is determined that any part of a tion of profits to the extent that it would not be possible to related party transaction should not be recognize the earnings from the interest owed by the borrower. characterized as debt, what are the consequences to both the borrower and 5. Are there any relevant court cases or tax the related lender? rulings in your country dealing with the transfer pricing of intercompany financing If the ITA determine that the any part of an intercompany fi- transactions? nancial transaction should not be characterized as debt, it may lead to an adjustment that could impact both related parties. Israel has been facing an increasing number of disputes be- From the borrower’s perspective, it may lead to the disregard tween taxpayers and the ITA that must be settled by the courts. of the deductibility of the costs incurred in relation to such a A few of these cases are currently in court. transaction for tax purposes, namely, the interest paid over the amount granted and other costs that may be associated with it Yariv Ben-Dov is Head of Transfer Pricing at Lion Orlitzky & Co. – Moore Stephens Israel. (guarantee payments and other related expenditures). He may be contacted at: From the lender’s perspective, recharacterization of a financ- [email protected] ing transaction as a capital contribution may result in a reduc- www.lionorl.co.il

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 39 Italy Marco Valdonio, Aurelio Massimiano, and Mirko Severi Maisto e Associati

1. How does your country identify contractual terms are consistent with the functional and adjust related party financing analysis and the actual conduct of the parties to the transactions? What is your country’s transaction. In cases where the contractual terms are not aligned approach to determining whether with the actual behavior of the parties, the Italian tax the debt arising from a related party authorities tend to re-characterize the transaction in financing transaction should be light of the non-recognition provision included in the properly characterized as debt? OECD TPG. In some instances, the Italian tax authori- ties may re-characterize the transaction on the basis The Italian transfer pricing legislation is governed by of domestic general anti-abuse principles, which has Article 110(7) of the Consolidated Tax Act (CTA) re- been endorsed by Italian case law. Recently, the Su- cently amended by Article 59 of Law Decree No. 50/ preme Court decision, Supreme Court No. 7493 of 15 2017. While the previous formulation of this provision April 2016, which dealt with the application of trans- made reference to the so-called ‘‘normal value’’ for de- fer pricing rules to non-interest-bearing loans. In par- termining the price for intercompany cross-border ticular, the Court ruled that in order to determine the transactions (a domestic definition largely resembling arm’s-length nature of a transaction, it is necessary to but not completely identical to the OECD arm’s length examine the economic substance of the transaction, principle), the amended rules are aligned with the irrespective of any obligation eventually negotiated by OECD standards and now generally refer to the ‘‘con- the parties concerning the payment of consideration ditions and prices that would have been agreed be- (i.e., interest). tween independent parties acting on an arm’s-length The re-characterization is usually grounded on the basis and in comparable circumstances.’’ basis of Article 110(7) of the CTA. However, as men- tioned above, it has been observed that during tax In order to implement the recent changes to the audits, the Italian tax authorities have also re- transfer pricing rules, on May 14, 2018, the Italian characterized intercompany transactions on the basis Ministry of Finance released a Ministerial Decree set- of the domestic provision on abuse of law, even ting out general guidance for the correct application though the provision is not specifically designed to of the arm’s length principle. Notwithstanding the target transfer pricing issues. According to Art. 10-bis Ministerial Decree, Circular No. 32/9/2267, dated Sep- of Law No. 212 of 27 July 2000, there is ‘‘abuse of law’’ tember 22, 1980 (‘‘1980 Circular’’), still represents the when one or more transactions, despite being for- most comprehensive guidance issued by the Italian mally compliant with the tax rules, (i) lack any eco- tax authorities to date. Given the broader scope of ap- nomic substance and (ii) are mainly aimed at plication of the 1980 Circular compared to the Minis- obtaining undue tax advantages. In particular, trans- terial Decree, the relationship between the two actions are deemed to lack economic substance when documents is certainly an important issue to be clari- facts, actions, and agreements, even when related to fied by the Revenue Agency in the near future. How- each other, do not have a legitimate business purpose ever, it seems reasonable to conclude that considering other than tax advantages. In this regard, Article 10- the explicit reference made by the Ministerial Decree bis makes reference to cases where there is an incon- to the OECD Transfer Pricing Guidelines (TPG) and sistency between the qualification of the individual the reference made under the new Article 110(7) to the transactions and their legal basis as a whole and international best practices, the 1980 Circular should where the choice to use certain legal instruments is in- be deemed superseded where it contradicts the OECD consistent with the ordinary market practice. This ap- TPG. Definitive clarification will probably come in proach seems to be confirmed by a recent decision forthcoming decrees or circulars provided for by Ar- (No. 414 of 12 April 2018) of the Regional Tax Court of ticle 9 of the Ministerial Decree to be issued in the Liguria, which affirmed that tax authorities are not al- future to provide guidance on specific topics. lowed to re-characterize a related-party loan as an With respect to question one, above, the Italian tax equity contribution solely on the basis of Article authorities usually follow a ‘‘substance over form’’ ap- 110(7) of the Italian Consolidated Income Tax Act. proach that is in accordance with the OECD TPG. The However, it should be noted that Article 110(7) of the ‘‘substance over form’’ approach verifies whether the CTA (as amended by the Law Decree 24 April 2017,

40 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 No. 50, converted with amendments by Law No. 96 of 21 June taking into consideration the market where the borrower ob- 2017) now provides: tained the funds. In affirming the substantial approach, the Items of income arising from transactions with non-resident 1980 Circular provides some examples in which the arm’s- companies that, directly or indirectly, control the enterprise, length interest rate should differ from the prevailing interest are controlled by it, or are controlled by the same company rate in the country of the lender. In particular, the 1980 Circu- controlling the enterprise are determined based on the condi- lar highlights the following cases: tions and prices that would have been agreed between indepen- dent parties acting on an arm’s-length basis and in comparable q a lender that obtains funds from a low tax jurisdiction; circumstances. The introduction of the reference to conditions (as well as q a lender that obtains the funds in the same country in which prices) could be interpreted as the basis for the re- the borrower is a resident; and characterization. As for the elements that need to be considered for the pur- q pose of re-characterization, Circular No. 6 of 30 March 2016 a lender that obtains the funds under special conditions (i.e., specifically deals with the application of the non-recognition incentives for granting international loans). provision to disregard a loan arrangement (particularly in the Step Two - Identification of Comparable Transactions context of leverage buy-out transactions) and re-characterize the loan for tax purposes as an equity investment, whereupon In our experience, Italian tax authorities mainly determine the interest would not be deductible. According to the circular, arm’s-length interest rates by applying the external comparable the non-recognition may be applied when the Italian tax au- uncontrolled price (CUP) method, unless there is an actual thorities analyze the facts, circumstances, and objective indica- comparable transaction entered into by the tested party with tors of a transaction on a case-by-case basis and demonstrate independent lenders. The application of this method can follow the existence of one or more of the following conditions: (i) the two different approaches. Under the first approach, the Italian repayment of the shareholder loan is subordinated to the re- payment of third-party loans; (ii) the financial covenants do not tax authorities make reference to the average interest rates on include the shareholder loan within the definition of debt; or similar loans provided by the official bulletins of the Central (iii) the repayment of the shareholder loan (or the payment of Bank of the lender’s country or, in general, of the Bank of Italy. interest thereon) is subject to the same restrictions on the pay- The weakness of this approach derives from a situation in ments of dividends and of equity. which the data from the Central Bank bulletin refer to bank loans and contain statistic data derived from unverifiable 2. What rules or guidance exist in your sources; hence, it would not be an appropriate CUP when the country to determine the arm’s length lender is not a financial entity. Under the second approach, an interest rate for a related party financing arm’s-length interest rate may be determined as follows: transaction? (i) The credit rating of the debtor is determined on the basis This issue has been addressed by the Italian tax authorities only of financial and non-financial information (e.g., using Moody’s marginally. Indeed, Circular No. 32/9/2267, dated September databases or similar models); 22, 1980, is mainly focused on identifying a relevant market for (ii) The appropriate spread is determined on the basis of the the identification of comparables. However, in our experience, the arm’s-length interest rate is generally determined by the credit rating obtained above (i.e., at the time of granting the Italian tax authorities by applying the CUP method. loan), looking at the rate applied in publicly traded financing In cases where there is no internal CUP, the following two- transactions to borrowers (more generally bond issuances) step approach is generally followed to identify external bench- with a similar rating. This credit spread (generally applied on a marks: reference rate such as Euribor) corresponds to spreads charged Step One - Identification of the Relevant Market by third parties on loans to debtors with similar credit ratings; The 1980 Circular is focused on the identification of the rel- and evant market for the selection of comparables, and it states that in determining the arm’s-length value of interest, reference (iii) If necessary, the interest rate determined above is ad- should be made to the current interest rate prevailing in the justed on the basis of the specific terms and conditions of the lender’s country of residence. This position is based on the as- intragroup loan (e.g., maturity, currency, subordination, etc.). sumption that, in general, the borrower is the one that seeks a In some instances, historic or existing external bank financing loan in the market of the lender and, normally, the conditions may also be used by a taxpayer as an internal CUP. of a loan do not change depending on the location of the bor- rower. In addition, the 1980 Circular lists some factors that Finally, it should be mentioned that according to a principle should be taken into account in determining the arm’s-length codified in the Civil Code, liquidated and payable claims accrue interest rate that include, among others, the ‘‘financial situation interest by operation of law, unless otherwise established by the of the borrower’’ and the ‘‘guarantee given for the loan.’’ law or title (Art. 1282(1) of the Civil Code). Art. 1284 of the Civil Although the position expressed in the Circular is quite dated Code provides that the interest rate agreed upon by the parties and is based on a static concept of capital markets that surely must be specified in writing; otherwise, interest is due at the no longer applies today (where borrowers could gather financ- legal rate. The Civil Code (Art. 1815) expressly provides that the ing from anywhere in the world), tax authorities tend to apply this approach even though it is now in conflict with the OECD presumption of legal interest also applies to loans. Tax courts TPG. have confirmed that this presumption of legal interest applies However, the 1980 Circular also provides that the ‘‘criterion to loans in the absence of a written agreement with a legally cer- of the lender’’ must be interpreted and applied in a flexible way, tain date that confirms that the loan is interest-free.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 41 3. Besides the determination of whether a 5. Are there any relevant court cases or tax transaction’s interest rate is at arm’s rulings in your country dealing with the length, what other factors does your transfer pricing of intercompany financing country consider in deciding whether the transactions? related party financing is arm’s length and acceptable overall? Examples of 5.1. Arm’s length interest rate additional factors may include: contractual terms, functions of the 5.1.1. Interest charged With respect to financial transactions involving the assess- companies involved, characteristics of the ment of interest rates, the issue has been addressed by the Ital- companies’ financial products or services, ian tax courts in several decisions. For instance, starting with economic circumstances, or business the oldest case, the Provincial Tax Court of Rome, in Decision strategies. 342/34/98, dated February 4, 1998, dealt with a case involving a loan granted by an Italian resident company to a German affili- The Italian transfer pricing legislation does not provide specific ated company. In determining the arm’s-length interest, the tax guidance to taxpayers on which factors should be considered in authorities made reference to the interest in the market of the lender. The Court rejected the assessment of the tax authorities deciding whether the related-party financing is arm’s length on the basis that the loan was executed in Germany and the cur- and acceptable overall. However, the Italian tax authorities rency was the German Mark. The Court also indicated that the scrutinize the following five economically relevant characteris- amount of the loan and the duration and financial status of the tics noted in Chapter I of the TPG: lender must also be considered in determining the arm’s-length (i) Contractual terms of the transaction: typically explicitly interest. stated in a written agreement and assessed based on the actual Subsequently, in Decision 253, dated November 15, 2002, the conduct of the parties; Provincial Tax Court of Ravenna ruled in favor of the Italian tax authorities. In a case involving an Italian company that funded (ii) Functional analysis: identification of functions per- a foreign subsidiary interest-free, the Court held that the Italian formed by both the lender (e.g., analysis and evaluation of risks company should charge the foreign subsidiary interest at a rate in the loan) and the borrower (e.g., ensuring availability of determined on the basis of an external CUP, using the statisti- funds to service the loan); cal data collected by the Italian Association of Banks. In Decision 113 of April 20, 2010, the Provincial Tax Court of (iii) Characteristics of financial products or services: identifi- Milan accepted the transfer pricing claim challenged by the tax cation of the relevant features and attributes of the transaction, authorities, which was based on an interest rate equal to Euri- including inter alia, amount, maturity, repayment schedule, bor, plus a certain spread. However, the Court gave no explana- currency, etc.; tion of the reasons for its conclusion; therefore it is impossible to infer which criteria were adopted by the Tax Court. (iv) Economic circumstances: assessment of geographic lo- cations, macro-economic trends, etc.; and In another case, Decision 48/2/11 of 24 February 2011, the Regional Tax Court of Piedmont confirmed a reassessment (v) Business strategies. notice that had been issued by the tax authorities based on the criteria explained in the 1980 Circular. The Provincial Tax In our experience, we are not aware of cases in which the Ital- Court of Brescia, in Decision 13 of 4 February 2013, affirmed ian tax authorities perform an analysis of the ‘‘options realisti- that reference to Euribor is appropriate for transfer pricing cally available’’ to both parties, as suggested in the OECD’s purposes, while reference to Libor is not. discussion draft on financial transactions. In the second half of 2013, the Supreme Court dealt with the issue of interest on loans and transfer pricing in its Decision 22010 of 25 September 2013. In this case, the Supreme Court 4. If it is determined that any part of a stated that, in determining the arm’s-length value of interest, related party transaction should not be reference should be made to the current interest rate prevailing characterized as debt, what are the in the lender’s country of residence (confirming the criterion of consequences to both the borrower and the ‘‘lender’’ provided by the 1980 Circular). Furthermore, the the related lender? Supreme Court endorsed the possibility for the tax authorities to make reference to the official bulletins of the Central Bank of the lender’s country on average interest rates on loans. It should be noted that the Italian tax authorities usually re- characterize the debt when the Italian company is the bor- There are also cases where the Italian tax courts came to the opposite conclusion. Indeed, in Decision 2725, dated June 18, rower. In this case, the application of the non-recognition 2015, the Regional Court of Lombardy cancelled the transfer provision to disregard a loan arrangement and re-characterize pricing adjustments claimed by the Italian tax authorities the loan for tax purposes as an equity investment would imply based on the official bulletins of the Bundesbank as a reference the non-deductibility of the interest expenses. As clarified by for determining the interest rate in a loan between an Italian Circular No. 6 of 30 March 2016, the re-characterization should company and its German parent company. In particular, ac- be done in a full-fledged fashion, thus treating re-characterized cording to the Tax Court, the bulletins should not be considered shareholder loans as equity increases for the purposes of the a reliable benchmark. In a more recent case, the Provincial Tax notional interest deduction (allowance for corporate equity or Court of Milan, in Decision 4106 of 13 June 2017, also stated ‘‘ACE’’) and treating interest expenses as dividends for with- that the interest rate set by the European Central Bank should holding tax purposes. be considered arm’s length. Moreover, the Provincial Tax Court

42 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 of Milan, in Decision 468 of 2 February 2018, dealt with a case had shown that the loan’s purpose was to finance the French involving a related-party loan and affirmed that the determina- subsidiary for the acquisition of a participation in another tion of the arm’s length interest rate — and in particular the ap- French company. In conclusion, based on the above grounds, propriate spread — should be established by taking into the Court ruled in favor of the taxpayer and maintained that the account the entire group’s capital position. interest-free loan was not subject to transfer pricing rules. 5.1.2. Interest-free loans The Regional Tax Court of Lombardy (Decision 472 of Febru- One important issue in Italy is the treatment of interest-free ary 12, 2015) and the Regional Tax Court of Friuli Venezia loans from the perspective of both the tax authorities and the Giulia (Decision 308 of October 17, 2016) have also confirmed Supreme Court. Indeed, the Italian tax authorities take the po- that interest-free loans do not violate transfer pricing rules. Re- sition that transfer pricing rules are applicable to both interest- cently, however, the Supreme Court took the opposite view in bearing and interest-free loans. However, the view of the Decision 7493 of April 15, 2016, wherein the Court held that in- Supreme Court on this matter seems to be quite inconsistent. tragroup interest-free loans are in fact subject to transfer pric- For example, the Supreme Court issued an interesting interpre- ing rules and that interest income must be determined based on tation with regard to the application of transfer pricing rules to the arm’s-length principle. In particular, the Supreme Court a cross-border interest-free loan advanced by an Italian parent stated that the application of transfer pricing rules to interest- company to its wholly-owned subsidiary in France. In Decision free loans should not be neglected based solely on the occur- No. 15005, dated July 17, 2015, the Supreme Court began its rence of taxable income, but analyzed in connection with the reasoning by referring to the domestic transfer pricing provi- loan’s economic substances and compared to similar transac- sions for the year at issue in Articles 110 and 9 of CTA. Accord- tions. The above conclusion has also been confirmed by Deci- ing to domestic transfer pricing rules, items of income arising sion 3773, dated September 26, 2017, and by the Regional Tax from transactions with non-resident associated enterprises Court of Lombardy in Decision 1452 of April 3, 2018. were determined based on the ‘‘normal value’’ of the goods sold, services rendered, and goods or services received. The ‘‘normal 5.2. Guarantee fees value’’ was defined as the ‘‘price or consideration’’ applied on average for the same or similar goods or services, in free com- In Decision 687 of 9 November 2011, the Regional Tax Court of petition conditions and at the same market level, in the time Lazio dealt with transfer pricing aspects of comfort letters (pa- and place where the goods and services were purchased or ren- tronage) by a nonresident parent company to guarantee loans dered (or lacking that, in the nearest time and place). In the to its resident subsidiary. After affirming that it is normal prac- view of the Court, the ‘‘normal value’’ stipulated by domestic tice to grant intragroup guarantees for no consideration, the transfer pricing rules should be interpreted consistently with Tax Court stated that, in the case at hand, the guarantee was the arm’s-length principle in light of the OECD TPG. granted against a certain compensation paid by the resident After the preamble, the Court looked at the objective and pur- subsidiary to its nonresident parent company because it was pose of transfer pricing rules and maintained that the purpose aimed at guaranteeing loans to third parties that have business of transfer pricing rules is twofold. On the one hand, the Court relations with the resident subsidiary (namely dealers and cli- stated that transfer pricing rules allocate taxing powers be- ents who purchased automobiles). The Tax Court then con- tween tax jurisdictions with respect to certain transactions cluded that the fee could not be regarded as tax deductible, as with cross-border features. Under this perspective, transfer the guarantee was not for the benefit of the resident subsidiary pricing rules confer to the contracting states the ability to tax but rather for the benefit of third parties. Recently, in Decision certain profits that would have accrued if the associated enter- 1224/4/16 of 13 October 2016, the Regional Tax Court of Pied- prises that are residents in the two contracting states had regu- mont dealt with a case involving an intragroup guarantee made lated their commercial or financial relations on the basis of by a parent company in favor of its subsidiaries and without conditions that would have existed between independent enter- compensation. The Regional Tax Court of Piedmont concluded prises. On the other hand, the Court maintained that transfer that Article 110(7) of the CTA does not require the parent com- pricing rules also have an anti-avoidance purpose. In particu- pany to charge a guarantee fee in all circumstances. The Court lar, the rules grant tax authorities the power to adjust the prices accepted the benefit-test approach of the taxpayer, who claimed applied in business transactions between associated/controlled that granting such a guarantee allowed revenues from the core entities that are residents in several jurisdictions, with the aim business to be kept at the very same level. The Regional Tax of preventing artificial adjustment of prices for the purpose of Court also expressed doubt about whether Article 110(7) of the optimizing the tax burden of the group (for instance, by shift- CTA applied at all in such a case, which concerned an operation ing the income toward companies established in territories or without compensation. jurisdictions characterized by lower taxation). Thus, on these grounds, with regard to the first purpose of transfer pricing 5.3. Leveraged-buy-out (‘‘LBO’’) transactions rules (i.e., allocation of taxing powers), the Court took a very formalistic approach and held that the application of the trans- An area of recent focus by the Italian tax authorities is intra- fer pricing rule is subject to two conditions: (i) that the taxpayer group financing in the context of LBO transactions. The cases derives (positive or negative) items of income from the intra- affected are those where an Italian acquiring company raises group transaction and (ii) the application of the normal value debt (on an intercompany basis or with the guarantee of the criterion causes an increase in the taxable income. Hence, in parent) to make an acquisition under an LBO scheme. In mul- the case of interest-free loans, those conditions are not fulfilled, tiples instances, litigation has been triggered by the denial of an as under such an agreement there is an absence of any price or interest expense deduction incurred in LBO transactions car- consideration necessarily comparable with the ‘‘normal value.’’ ried on by foreign investors through an Italian vehicle funded With regard to the second purpose of transfer pricing rules, in with third-party debt. The claim of the tax authorities is gener- examining the case from an anti-avoidance perspective, the ally grounded on: (i) either transfer pricing provisions (main- Court maintained that the tax authorities did not prove either taining that the Italian vehicle must charge the foreign investor the shifting of income toward low-tax jurisdictions or the ab- with an amount equal to the interest expenses incurred); (ii) the sence of valid economic reasons and, instead, that the taxpayer lack of any benefit from the interest expenses for the Italian ve-

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 43 hicle (the interest expenses are regarded as beneficial to the for- was on average in a negative liquidity position. This approach eign investor); (iii) application of the non-recognition was initially taken in ruling (No. 194/E, dated October 8, 2003), provision. With reference to the latter aspect, a recent Decision wherein the authorities addressed the ‘‘notional cash pooling’’ of the Provincial Tax Court of Milan (4419 of 28 June 2017) in- arrangement. This arrangement provided that the balance of volved the case of an Italian company that purchased an equity each account was to be notionally transferred. Particularly, stake of a Belgian associated enterprise through an LBO trans- each party opened a bank account with a nonresident bank, action. The Italian tax authorities challenged the transaction and it was agreed that, for the purposes of the dealings between on the grounds that the operation was deemed abusive since the bank and the group, all the accounts of the group entities the Italian related company had benefited from a higher were regarded as a whole. For this reason, each group entity amount of deductible interest expenses, compared to what was entitled to have a negative balance to the extent that the would have occurred between unrelated parties. With respect overall balance of the group was not negative. The tax authori- to the shareholder loan, the Court affirmed that the Italian tax ties concluded that the interest paid by the resident group com- authorities are not allowed to re-characterize transactions be- pany to the nonresident bank was to be regarded as income tween related parties solely on the basis of their ‘‘form.’’ Such from a cash loan. cases would be outside the scope of transfer pricing, as it is not After this initial position, Italian courts have issued several possible to re-characterize the actual transaction if it is under- decisions that are inconsistent with this ruling. It is worth men- taken at arm’s length. Still, in the context of LBO transactions, tioning Decision No. 1348 of 15 March 2017, among the most a recent Decision (414 of 12 April 2018) of the Regional Tax recent, which was handed down by the Regional Tax Court of Court of Liguria affirmed that tax authorities are not allowed to Lazio. In this case, the Italian tax authorities had claimed that re-characterize a related-party loan as equity contribution the cash pooling agreement was not comparable to a bank ac- solely on the basis of Article 110(7) of the CTA. The reasoning count because (i) the depository did not make available the of the Court is that, since Article 110(7) of the CTA provides that sums that could be required by the account holder at any time; items of income arising from transactions with nonresident as- (ii) the amounts contributed were not available until the termi- sociated enterprises are determined based on the ‘‘normal nation of the relationship; and (iii) the arrangement was more value’’ of the goods sold, services rendered, and goods or ser- similar to a financing agreement. The Regional Tax Court did vices received, the only transfer pricing adjustment that the tax not agree. It determined that the intercompany agreement was authorities could perform would be regarding the arm’s-length not in fact aimed at ensuring that the cash pooling members interest rate. Moreover, the Court held that the reference made had the economic resources necessary for their operations, but by the tax authorities to the OECD TPG and particularly to the rather (by carrying out an activity that structurally produces possibility of applying the non-recognition provision solely on substantial cash surpluses) at optimizing the management of the basis of the ‘‘substance over form’’ principle are no longer these cash surpluses by concentrating them on a single entity. appropriate, as the more recent paragraph 1.123 of the BEPS In addition, the Court found that the agreement under review Actions 8-10 (included in the 2017 version of the OECD TPG) did not include any obligation for the pool leader to repay the replaced the substance over form test and kept instead the com- sums transferred to them at the end of the contract (but only mercial rationality test. provided for the payment of the outstanding balance) and pro- Furthermore, despite a number of cases where low-tier vided for reciprocal remittances by both parties. judges have confirmed the deductibility of interest and a case In contrast, in Decision No. 1205 of 13 November 2015, the where the Supreme Court affirmed that interest expenses Regional Tax Court of Piedmont confirmed the full legitimacy should in all events be subject to a benefits test, there is not yet of the tax authorities’ assessments. The Regional Tax Court ap- a firm case law and, therefore, the matter is quite uncertain. plied the following reasoning: i) even if the cash pooling had been a centralized method of group treasury management, it 5.4. Cash pooling enabled the company with a positive balance to finance a pool member with the negative one; and ii) the economic advan- With regard to intragroup cash pooling and transfer pricing, tages obtained by the cash pooling member through the cash tax authorities’ reclassification of cash pooling as loan agree- pooling agreement were modest, and the transactions were un- ments has been a cause of litigation. The cases affected are balanced. those where, notwithstanding the formal structure of the cash pooling arrangement, there a number of indicators that lead Marco Valdonio and Aurelio Massimiano are Partners at Maisto e the tax auditors to determine that the cash pooling agreement Associati, and Mirko Severi is an Associate at Maisto e Associati. They may be contacted at: does in fact disguise a cash lending agreement (rather than a [email protected] current account entered into for the pooling of temporary li- [email protected] quidity balances). Specifically, the position of the tax auditors [email protected] is usually grounded on the circumstance that the cash pooling www.maisto.it

44 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Japan Takuma Mimura Cosmos International Management

1. How does your country identify Article 66-4 (7)-4: In the case of applying the method and adjust related party financing equivalent to the comparable uncontrolled price method or the method equivalent to the cost plus method for transactions? What is you country’s monetary loan/borrowing transactions, the currency approach to determining whether pertaining to the comparable transactions should be the the debt arising from a related party same with the currency pertaining to the foreign-related financing transaction should be transaction, and various factors affecting the interest properly characterized as debt? rate, such as borrowing date, borrowing period, the methods of interest rate (fixed or variable, single inter- Intercompany loan transactions are the only material est, or compound interest, etc.), the interest payment related party financial transactions for most multina- method (pay in advance or in arrears), the creditworthi- tional enterprises. The Japanese tax authorities can ness of the borrower, existence of collateral and guaran- identify intercompany loan transactions from the Re- tee, and so on, should be similar between the lated Party Disclosure form, Appendix 17(4), which is comparable transactions and the foreign related trans- attached to the corporate tax return, and from the re- action. lated party loan agreement that is submitted by tax- (Note) Method to calculate an arm’s length interest payers when a tax audit is initiated. rate that would be applied as if borrowers in the foreign- When dealing with inbound transactions, the tax related transaction would have borrowed from banks, authorities may question the validity of the debt and etc. under the similar conditions as the relevant foreign- recharacterize it as equity if no related party loan related transactions will be a method equivalent to a agreement exists. method consistent with the comparable uncontrolled Tax authorities may insist that the appropriate price method. amount of interest based on the terms and conditions Thus, the above Circular approves the use of meth- of the receivables be charged to the foreign affiliates, ods equivalent to CUP and Cost Plus methods. The for outbound transactions, if the long standing receiv- Circular also indicates that under the method equiva- able may be deemed a related party loan. Such receiv- lent to the method consistent with the CUP method, ables may be deemed a related party loan if the the deemed borrowing rate can be used as a compa- Japanese affiliate (usually parent company) has a sub- rable interest rate by the borrower of a foreign-related stantial amount of long standing account receivables transaction from a financial institution (even if the that are due from the foreign affiliates. funds are not actually borrowed). In addition to the general rule stated above, in the ASMT Circular, a 2. What rules or guidance exist in method equivalent to a method consistent with the your country to determine the arm’s CUP method is allowed as a simplified method in cal- length interest rate for a related culating arm’s length loan interest rates for related party financing transaction? party loan transactions by companies not doing finan- cial service business. This method is described in the In Japan, Article 66-4 of the Act on Special Measures following article of the Commissioner’s Directive on concerning Taxation (‘‘ASMT’’), provides the base law the Operation of Transfer Pricing (Administrative for transfer pricing taxation, but the law itself does Guidelines), which has been issued by the NTA (‘‘TP not specify how to evaluate an arm’s length rate on re- Directive’’). lated party loans. Instead, the National Tax Agency Article 3-7. In conducting examinations on lending (‘‘NTA’’) provides Circulars on aspects of transfer pric- and borrowing activities between a corporation and a ing taxation, which serve as internal guidance for its foreign-related person, in cases where neither party is tax examiners. The NTA has released a Circular re- engaged in lending or investment activities as a busi- lated to ASMT (‘‘ASMT Circular’’), Article 66-4 (7)-4, ness, an application of a method equivalent to the which specifically provides guidance on related party method consistent with the comparable uncontrolled loans. A relevant excerpt from the ASMT Circular has price method using the following interest rate as the been included below: arm’s length interest rate shall be considered where nec- Treatment of Loan or Borrowing of Money essary:

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 45 (1) The interest rate that would normally be applied to a loan, as- as a ‘‘bankability’’ opinion, stating what interest rate the bank suming that the borrower involved in the foreign-related trans- would apply were it to make a comparable loan to that particular action made the loan from an unrelated bank under similar enterprise. conditions in terms of currency, borrowing date, and borrow- 93. Such an approach would represent a departure from an ing period. arm’s length approach based on comparability since it is not (2) The interest rate that would normally be applied to a loan, as- based on comparison of actual transactions. Furthermore, it is suming that the lender involved in the foreign-related transac- also important to bear in mind the fact that such letters do not tion made the loan from an unrelated bank under similar constitute an actual offer to lend. Before proceeding to make a conditions in terms of currency, borrowing date, and borrow- loan, a commercial lender will undertake the relevant due dili- ing period. gence and approval processes that would precede a formal loan (3) The interest rate that would normally be earned on the funds offer. Such letters would not therefore generally be regarded as involved in the foreign-related transaction, assuming that they providing evidence of arm’s length terms and conditions. were invested in government securities or the like under similar The above paragraphs seem to indicate that deemed or not conditions in terms of currency, transaction date, and transac- actual comparable data are not generally acceptable as a basis tion period (exclusive of cases where the interest rate set forth for determining the arm’s length interest rate. TP Directive 3-7 in (1) is applicable). (1) and (2) do not directly mention bank opinions but do allow the use of non-actual deemed transactions. Even though the Note: OECD discussion draft is currently on a non-consensus basis, if 1. For the above three methods, the order (1), (2), (3) coincides it were finalized as is, the National Tax Agency (‘‘NTA’’) might with the preferred order of the methodology to be able to obtain have to review TP Directive 3-7 (1) and (2) because it would be the arm’s length result. against the principle that seems to be in the OECD guidance. 2. In cases where the interest rate set forth in (2) is applicable and the loan actually made from a bank and so on to the lender in 3. Besides the determination of whether a the foreign-related transaction is a loan made under similar con- transaction’s interest rate is at arm’s ditions as set forth in (2), whether the loan has a conditional re- lationship with the foreign-related transaction is of no relevance. length, what other factors does your In summary, although Japanese transfer pricing law does not country consider in deciding whether the specify the applicable transfer pricing methods for related related party financing is arm’s length party loans, it is generally understood, from the NTA’s internal and acceptable overall? Examples of administrative guidance, that the method equivalent to the additional factors may include: CUP method and the Cost Plus method are applied. contractual terms, functions of the This is particularly true with respect to related party loans by companies involved, characteristics of the non-financial service industry lenders, where a less strict method called ‘‘the method equivalent to the method consistent companies’ financial products or services, with CUP method’’ is applied. Here, the NTA and its regional tax economic circumstances, or business bureaus (‘‘tax authorities’’) usually apply, in the order (1) to (3), strategies. the NTA’s internal guidance TP Directive 3-7 to related party loans by non-financial industry lenders. As mentioned above, ASMT Circular Article 66-4 (7)-4 states that in applying the appropriate transfer pricing methods for In applying TP Directive 3-7 (1) and (2), even if there is no monetary loan/borrowing transactions, the currency pertain- actual comparable borrowing by the related party borrower ing to the comparable transactions should be the same as the (for (1)) or the related party lender (for (2)) from unrelated currency pertaining to the foreign-related transaction, and banks, the tax authorities can apply the deemed borrowing rate various factors affecting the interest rate, such as borrowing that the borrower or the lender would have used when under date, borrowing period, the interest rate method (fixed or vari- similar terms and conditions from the market. Recently, inter- able, single interest or compound interest, etc.), the interest bank rates such as TIBOR (for Japanese Yen, ‘‘JPY’’) or LIBOR payment method (pay in advance or in arrears), the creditwor- (for USD) for short-term loans, or fixed swap rates for long- thiness of the borrower, existence of collateral and guarantee, term loans, are used for base rates, and the tax authorities tend and so on, should be similar between the comparable transac- to apply an ‘‘appropriate’’ comparable spread. In the past, the tions and the foreign-related transaction. typical spread was 0.5%. The most important comparable factor is currency because Recently, because of extremely low JPY interest rates and each currency has its own arm’s length interest rate. For ex- fierce competition among Japanese banks, JPY spreads in the ample, even though all the other conditions are the same be- market have been sharply reduced even for smaller sized and tween a US Dollar-denominated comparable transaction and a less creditworthy borrowers. The reduction has been especially Japanese Yen-denominated tested party transaction, the trans- true for JPY-currency borrowing. actions are not comparable because of the difference in the cur- However, on July 3, 2018, the OECD issued a discussion draft rency. on financial transactions in relation to Actions 8-10 (Aligning Also, TP Directive 3-6 (2) states: Transfer Pricing Outcomes with Value Creation) of the BEPS In cases where the maturity date of a foreign-related transac- Project. The Draft is the first transfer pricing guidance issued tion is unknown, the period of the loan shall be reasonably calcu- by the OECD, and page 24 of Chapter C. 1.7 specifically covers lated in light of the purpose of the loan. ‘‘Pricing approaches to determining an arm’s length interest The above rule is considered to be introduced by the NTA, rate,’’ which states the following: who wants to collect interest revenue from overseas affiliates Bank opinions with outbound transactions in mind. However for inbound 92. In some circumstances taxpayers may seek to evidence the transactions, it is likely that the tax authorities would insist that arm’s length rate of interest on an intra-group loan by producing the loan transactions without the maturity date be character- written opinions from independent banks, sometimes referred to ized as equity, not debt. Japanese taxpayers with related party

46 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 borrowings from overseas affiliates, therefore, should make 5. Are there any relevant court cases or tax sure to state the appropriate maturity dates on the loan agree- rulings in your country dealing with the ments. transfer pricing of intercompany financing transactions?

4. If it is determined that any part of a As for the transfer pricing of intercompany financing transac- related party transaction should not be tions, there is a small number of publicly disclosed court cases, characterized as debt, what are the including some decisions by the National Tax Tribunal, which is an organization belonging to the NTA to resolve domestic tax consequences to both the borrower and disputes before proceeding to court, but all the cases are for the related lender? outbound transactions. For example, in October 2006, the Tokyo District Court upheld the tax authority’s transfer pricing If it is determined that any part of a related party borrowing adjustment on a Japanese manufacturing company’s related should not be characterized as debt, the amount of interest re- party loan transactions with its Thai subsidiary. The original adjustment by the tax authority referred to the Thai Baht’s lated to that part is not tax deductible. However, if the with- long-term market interest rate and applied it as a method holding taxes with regard to the payment of interest have equivalent to a method consistent with the CUP method (de- already been paid, such withholding taxes on the interest for fined in TP Directive 3-7, mentioned above), even though it was the part of the borrowing not characterized as debt are not re- not an actual comparable transaction. In addition, a National funded (TP Directive 3-26). Tax Tribunal case decided in February 2016 also upheld the tax authority’s decision to apply the method equivalent to a method In addition to transfer pricing, there are two other rules that consistent with the CUP method for an outbound related party can limit the deductibility of interest on related party debt. One loan transaction. is the traditional thin capitalization rule, and the other is an Although pricing on loan transactions based on market inter- earnings stripping rule, which became effective for fiscal years est rates may be easier to apply for the tax authorities, such en- beginning on or after April 1, 2013. While the thin capitaliza- forcement may not be in line with the OECD discussion draft’s hesitance in using non-actual comparable transactions. Atten- tion limitation on interest is balance sheet based (interest ex- tion should be paid to the finalization of the discussion draft pense on debt exceeding three times equity), the earnings and the NTA’s reaction to it (if any). stripping limitation is based on a company’s profit and loss statement, generally net related party interest expense exceed- Takuma Mimura is a Managing Director of Cosmos International ing 50% of adjusted income. Management Co., Ltd., an affiliate of Nagoya-based accounting firm, Cosmos Group. Cosmos International Management is also an Alliance If both the thin capitalization and the earnings stripping Partner of Transfer Pricing Associates group. Takuma may be contacted by email at: rules result in disallowed interest, the rule that denies the [email protected] higher amount of interest in that year applies. www.cosmos-international.co.jp/english/index.html

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 47 Korea Tae Hyung Kim and Seong Kwon Song Deloitte Korea

1. How does your country identify transactions between the resident and the foreign- and adjust related party financing related party include de facto monetary transactions, such as collection of bonds and payment of debts, transactions? What is your country’s which exceed ordinary periods of collection or pay- approach to determining whether ment. Therefore, the scope of related party financing the debt arising from a related party transactions include not only monetary transactions financing transaction should be in the form of loan agreements but de facto monetary properly characterized as debt? transactions, as well. In addition, Article 14. (1). of the LCITA provides a In Korea, there are laws to account for related party specific rule with respect to thin capitalization. If the financing transactions with respect to both monetary sum of the amount borrowed from a foreign control- transactions in the form of loan agreements and de ling shareholder (including loans provided by related facto monetary transactions. parties of the foreign controlling shareholder) and the Article 2 (Definitions) of the Law for the Coordina- amount borrowed by third parties with guarantees tion of International Tax Affairs (the ‘‘LCITA’’) specifi- from the foreign controlling shareholder exceeds cally defines the terms used in the LCITA. Article 2. twice the amount of the investment made by the for- (1). 1. of the LCITA defines ‘‘international transaction’’ eign controlling shareholder, interest paid on the as a transaction in which either or both of the parties excess is regarded as a non-deductible expense. LCITA are nonresidents or foreign corporations and are en- Enforcement Decree Article 24. (1). defines the scope gaged in trading or leasing tangible or intangible of borrowings subject to the thin capitalization rule as property; providing services; lending or borrowing the liabilities which generate the interest and discount money; and all other transactions involving profits or fees. losses and property of the parties. ‘‘Nonresidents or foreign corporations’’ are defined as entities that do not have a domestic place of business. Therefore, re- 2. What rules or guidance exist in lated party financing transactions are identified and your country to determine the arm’s adjusted in accordance with the same principle ap- length interest rate for a related plied to all other international transactions, as pro- party financing transaction? vided by the LCITA. In practice, both the tax authorities and taxpayers The Enforcement Decree (or Presidential Decree) of apply the Comparable Uncontrolled Price/Transaction the LCITA provides more details on determining an method to analyze interest rates charged between arm’s length method for the normal interest rate for third parties to determine an arm’s length interest monetary transactions applicable to an international rate. transaction between a resident (a Korean taxpayer) and a foreign-related party. Article 6. (7). of the LCITA On February 7, 2017, the Ministry of Economy and Enforcement Decree specifically states that monetary Finance (formerly the Ministry of Strategy and Fi-

48 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 nance) introduced and enacted the safe harbor rule on interest the borrower, etc.) shall not be recognized as a bad debt ex- rates (LCITA Article 6.(7).2.). pense or loss on disposal. The following interest rates are deemed to be arm’s length: (1) For outbound transactions between a domestic lender 5. Are there any relevant court cases or tax and foreign borrower, interest rate on overdrafts stipulated in Article 43.(2). of the Enforcement Rule of Corporate Tax Act rulings in your country dealing with the (the current rate is 4.6%); and transfer pricing of intercompany financing (2) For inbound transactions between a foreign lender and a transactions? domestic borrower, the 12-month Libor on the last day of the preceding fiscal year, plus 0.015 basis points (i.e., 1.5%) per cur- A safe harbor rule for domestic related party financing transac- rency (If there is no 12-month Libor rate available for a specific tions has existed since the 1990s, and ‘‘the weighted average currency, the 12-month US Dollar Libor rate plus 1.5% is ap- borrowing rate of interest’’ or ‘‘the interest rate of overdrawn plied.). account (current rate is 4.6%)’’ has been accepted as an arm’s length interest rate. 3. Besides the determination of whether a However, there had been no safe harbor rule regarding the in- transaction’s interest rate is at arm’s terest rate for international transactions until a rule was en- acted on February 7, 2017. Prior to the February 7, 2017 length, what other factors does your enactment, court cases, tax tribunal cases, and tax rulings had country consider in deciding whether the disallowed the use of the domestic safe harbor rule to interna- related party financing is arm’s length tional transactions (as mentioned above). With no safe harbor and acceptable overall? Examples of rule in place for international transactions, an arm’s length in- additional factors may include: terest rate for international transactions would have been de- termined using comparable uncontrolled transactions/prices, contractual terms, functions of the in accordance with the LCITA. companies involved, characteristics of the Most of the court and tax tribunal cases have been mainly companies’ financial products or services, concerned with the degree of comparability between the re- economic circumstances, or business lated party transaction(s) and the comparable third-party strategies. transaction(s). q Supreme Court 2011Du 6127. The form of issuance, matu- In analyzing an arm’s length interest rate, LCITA Enforcement rity, presence of credit enhancement, currency, issue Decree Article 6.(7).1. provides that four aspects of a transac- period, underlying asset, and proportion of preferred debt tion between a tested transaction and a third-party transaction should be taken into consideration for determining an need to be considered. The four aspects are: (a) amount of the arm’s length interest rate. obligation; (b) maturity of the obligation; (c) whether the obli- q Tax Tribunal 2012Gwang27. The issuer of the loan, the con- gation is secured; and (d) credit rating of the debtor. dition of payment (e.g., the method and period of redemp- tion) and related risk, and the process of determining the 4. If it is determined that any part of a interest rate should all be considered in determining an related party transaction should not be arm’s length interest rate. For the interest rate of borrow- characterized as debt, what are the ings related to private-invested businesses in social infra- consequences to both the borrower and structure, the profitability of such businesses, degree of development, and relevant risks must be considered. the related lender? Tae Hyung Kim, Ph.D., is an economist and former National Leader of the In Korea, the consequences to both the borrower and the re- Global Transfer Pricing Group at Deloitte Korea, and Seong Kwon Song is a lated lender is crystal clear. If a Korean taxpayer is the bor- Tax Principal at Deloitte Korea. rower, the interest paid is not considered deductible expenses. They may be contacted at: If a Korean taxpayer is the lender, the transaction shall be ex- [email protected] cluded from the calculation of bad debt allowance, and the [email protected] amount deemed impracticable to recover (due to a default of www2.deloitte.com/kr/en.html

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 49 Luxembourg Peter Moons, Gaspar Lopes Dias, and Fernanda Rubim Loyens & Loeff Luxembourg

1. How does your country identify tions of the loan, etc.). For holding activities, a maxi- and adjust related party financing mum debt-to-equity ratio of 85:15 has been the established practice of the Luxembourg tax authori- transactions? What is you country’s ties (LTA). approach to determining whether In addition to the above, the general principle of the debt arising from a related party substance over form applies. In this regard, a refer- financing transaction should be ence is made to the parliamentary documents on ar- properly characterized as debt? ticle 97 ITL, which establish the following: [A] loan is to be considered a participation where Article 56 of the Luxembourg Income Tax Law (ITL) the normal financing mode, dictated by serious eco- defines ‘‘related parties’’ as those who participate di- nomic or legal considerations, would have been a rectly or indirectly in the management, control, or capital increase and where it clearly results from the capital of the other, or if the same person(s) partici- circumstances such that the form of the loan could pate directly or indirectly in the management, control, not have been chosen for a purpose other than tax eva- or capital of both enterprises. The article does not sion. The absence of the usual legal form(s) of a loan, specify a percentage threshold. Despite the bill of law namely the fixing of the interest rate and repayment implementing the provisions of the EU Directive terms, the allocation of funds lent to long-term fixed 2016/1164 on anti-tax avoidance (ATAD) in Luxem- assets, the lack of guarantees, ]and] the disproportion bourg, establishing a 25% threshold,1 such a thresh- between the share capital and the funds lent provide old is not expected to alter the aforementioned broad- . . . presumptions of the existence of a disguised par- spectrum related parties’ definition, which is relevant ticipation in the form of the loan. It is also important for transfer pricing. to consider the circumstances under which the loan is Effective as of January 1, 2017, a new article 56bis granted.’’2 LIR lays down the basic principle that a transfer pric- Thus, for Luxembourg tax purposes, the qualifica- ing analysis must comply with the OECD Transfer tion of an instrument as debt or equity is not bound by Pricing Guidelines (TPG) and actions 8-10 of the its legal form, accounting treatment, or characteriza- BEPS Action Plan. Circular LIR n° 56/1 – 56bis/1 of 27 tion provided by another country. Instead, the sub- December 2016 (the ‘‘Circular’’) clarifies the Luxem- stance over form principle prevails, and the relevant bourg tax authorities’ interpretation of articles 56 and facts and circumstances are considered in order to 56bis LIR regarding intragroup financing activities. classify an instrument as debt or equity for tax pur- According to the Circular, intragroup financing ac- poses. In court case no. 38357C of 26 July 2017, the tivities comprise all interest-bearing lending to related administrative court applied these criteria to a loan companies, funded with financial instruments from granted by a Luxembourg shareholder to its Domini- within or outside the group. The guiding principles in can subsidiaries and added that the loan should the Circular are that intragroup financing companies qualify as equity to the extent that it had no fixed ma- need to have the financial capacity to assume risks turity or periodical interest and its remuneration was and the ability to control and manage such risks. With based on capital gains realized upon the disposal of respect to financial capacity, the previous 2011 circu- certain assets held by these subsidiaries. According to lars (LIR n° 164/2 and 164/2bis) generally considered the court, a global analysis – rather than a limited the adequate minimum amount of equity at risk to be analysis – should be made. In other words, all the the lower of either 1% of the intragroup financing terms, conditions, facts, and circumstances need to be amount or EUR 2 million. The Circular, however, reviewed together, instead of focusing on a single ele- states that the appropriate amount of equity at risk ment. should be determined on a case–by-case basis. Further, given the introduction of art. 56bis (7) ITL, As a result, until 2017, a debt-to-equity ratio of 99:1 the reclassification of an instrument may also be had often been applied to financing transactions. As of made on the basis of an ‘‘irrational transaction.’’ An ir- 2017, such a determination should be based on the rational transaction occurs when the form is consis- computation of the equity at risk, which is highly de- tent with the substance, but the arrangements or pendent on the facts and circumstances of the case elements of the transaction differ from those which (i.e., the borrower’ credit rating, the terms and condi- would have been adopted by independent enterprises

50 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 behaving in a commercially rational manner, making a signifi- able to attract debt under the given terms and, correspondingly, cant impact on the determination of the arm’s length price. whether the lender would have agreed to lend under those Compared to substance over form cases where an all-or- terms. Should the answer be negative, article 56bis (7) ITL pro- nothing approach is applied, in irrational transaction cases, vides for the non-recognition of a transaction, or parts thereof, certain parts or conditions of controlled transactions may be when it lacks commercial rationality. Because this provision is disregarded. effective as of January 1, 2017, no concrete examples of the ap- plication of this provision are available to date although, in fi- 2. What rules or guidance exist in your nancing transactions, tax authorities have laid special emphasis on the contractual terms. country to determine the arm’s length interest rate for a related party financing transaction? 4. If it is determined that any part of a related party transaction should not be Article 56bis of the ITL refers to the use of the five transfer pric- characterized as debt, what are the ing methods described in the TPG and provides for the selec- consequences to both the borrower and tion of the method that best approximates arm’s length prices the related lender? in each specific case. For related-party debt pricing, the Com- parable Uncontrolled Price (CUP) method is generally applied If a related party financing transaction is recharacterized, in by taxpayers and by the LTA, with or without comparability ad- whole or in part, from debt to equity, the consequences for a justments (where appropriate). The CUP method may, in prin- Luxembourg borrower are that: ciple, be applied together with other corroborative methods a. the interest will not be deductible from the corporate such as financial modeling of cash flows and blended cost of fi- income tax base (and therefore not from the municipal busi- nance analyses. Other specific financial methods (e.g., expected ness tax base either); and loss) are also used in certain cases to approximate an at-market b. the debt will not be deductible from the net wealth tax debt-to-equity ratio for the overall financing of the taxpayer’s base. debt investments. Both taxpayers and the LTA use data derived from publicly available sources and/or subscription-based da- For a foreign lender, the interest received may be subject to a tabases as evidence for market interest rates. 15% Luxembourg dividend withholding tax, unless the condi- tions required for the application of the dividend withholding The starting point in determining an interest rate is the credit tax exemption are met. As for a Luxembourg lender, the pro- rating of the borrower. For such purposes, projected cash flows ceeds received under the instrument in question may be and pro-forma financials (or past data in the absence of exempt if the conditions required for the application of the par- present-day and projected data) may be used. Factors such as ticipation exemption are met. relevant industries and countries where the borrower operates are also taken into account. Then, the features of the instru- ment, e.g., its payment ranking, maturity, specific terms and 5. Are there any relevant court cases or tax conditions, etc., are considered when assessing the credit rulings in your country dealing with the rating of the instrument. transfer pricing of intercompany financing In addition to the above, the Circular indicates that when a transactions? group financing company pursues a purely intermediary activ- ity, the transactions are deemed to comply with the arm’s length There are court cases and tax rulings dealing with the transfer standard if the entity receives a return of 2% (after tax) on its pricing of intercompany financing transactions. In the few debt investments (i.e., return on assets). As for undertakings court cases, the main discussion is about the imputation of a comparable to financial institutions, a 10% return on equity notional interest on debt instruments such as interest-free (after tax) can be considered indicative of an arm’s length com- loans, on the basis that third parties behaving in a commer- pensation. Also, according to the Circular, this percentage is to cially rational manner would not lend for free. For example, see be regularly updated by the LTA. Luxembourg Administrative Court 22 July 2015, n° 34190C. The LTA have been issuing tax rulings in many individual 3. Besides the determination of whether a cases. Regarding intragroup financing activities, the Circular transaction’s interest rate is at arm’s establishes that tax rulings dealing with the arm’s length prin- length, what other factors does your ciple based on the rules applicable before the entry into force of article 56bis ITL no longer bind the LTA as of January 1, 2017. country consider in deciding whether the Companies that wish to be covered by a new decision in this re- related party financing is arm’s length spect are required to submit a new request that is compliant and acceptable overall? Examples of with the requirements set out in the Circular, which includes, additional factors may include: among other factors, the accurate delineation of the transac- contractual terms, functions of the tion including the details of the parties and countries involved, as well as one of the five comparability factors; the list of com- companies involved, characteristics of the parables searched, rejected, and selected; the projections of the companies’ financial products or services, profit and loss accounts for the years covered by the request; economic circumstances, or business etc. Thus, taxpayers seeking an advance pricing confirmation strategies. for their intercompany financing transactions in Luxembourg should observe the OECD TPG incorporating the BEPS recom- Under articles 56 and 56bis ITL, the actual conduct of the par- mendations, which have been incorporated in the law through ties is decisive in accurately delineating a transaction. Notably, article 56bis of the ITL and regulated under the Circular. the five comparability factors described in detailed in the TPG may be used to assess whether a borrower would have been Peter Moons is a Tax Partner and Head of the Transfer Pricing team at

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 51 Loyens & Loeff Luxembourg. Gaspar Lopes Dias is a Tax adviser and Transfer Pricing specialist at Loyens & Loeff Luxembourg. Fernanda Rubim is a Tax adviser and Transfer Pricing specialist at Loyens & Loeff NOTES Luxembourg. 1 Article 164ter in the proposed wording is expected to enter into They may be contacted at: force on January 1, 2019. [email protected] [email protected] 2 Parliamentary Document n° 571/04 on the former article 114 ITL, [email protected] www.loyensloeff.com p. 180.

52 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Mexico Moises Curiel, Allan Pasalagua, and Rafael de la Mora Baker & McKenzie, Mexico

1. How does your country identify To date, Mexico has not adopted interest deduction and adjust related party financing limits based on ratio approaches suggested by the transactions? What is you country’s OECD as part of Action 4 of the BEPS program, but it looks like something will be implemented in the near approach to determining whether future. However, Mexico does have thin capitalization the debt arising from a related party rules, established in Article 28, Section XXVII of the financing transaction should be MITL, which limit the deduction of interest paid to re- properly characterized as debt? lated parties in amounts exceeding the 3:1 ratio of li- abilities to the equity of the company. The rules do not Article 76, Section X of the Mexican Income Tax Law apply to entities that are part of the financial system (‘‘MITL’’) establishes that companies conducting (as defined in the MITL) and debt for the construc- transactions with foreign-related parties must file rel- tion, operation, or maintenance of infrastructure evant information regarding these transactions in the linked to strategic areas of the country, or for electric Multiple Information Tax Return, which is filed to- power generation. Other exemptions and waivers re- gether with the annual tax return or the statutory tax garding thin capitalization rules may apply. For ex- report (Dictamen Fiscal). Through this informative ample, taxpayers who obtain an APA for return, tax authorities identify all intercompany intercompany loan transactions are not subject to this transactions of Mexican entities with related parties limitation. abroad, including financial transactions. The infor- mative return is designed to provide the authorities with elements to assess risk, such as the amount of the 2. What rules or guidance exist in transaction, the jurisdiction of the counterparty, inter- your country to determine the arm’s est rate, etc. length interest rate for a related Article 179 of the MITL empowers tax authorities to party financing transaction? determine the taxable income or authorized deduc- tions of taxpayers that have not carried out their Article 179 of the MITL establishes the comparability related-party transactions at arm’s length. This results criteria, which establish that for financial transac- in a tax liability that includes the amount of unpaid tions, taxpayers must consider in their analysis ele- tax, as determined by tax authorities, and the corre- ments such as the amount of the loan, term, sponding inflation, surcharges, applicable fines, and warranties, and borrower’s solvency. In an audit, tax possible double taxation. Transfer pricing adjust- inspectors generally apply a strict comparability ments are determined by tax authorities through their analysis, considering the following characteristics: faculty of perform audits according to Article 42 of the the currency of the loan, credit rating, type of interest tax code. If the tax authorities determine, through an rate (fixed or variable, and if variable, the base inter- audit procedure, that a financial transaction is outside est rate used), term of the loan, type of loan, warran- an arm’s length range, they may adjust the outcome of ties, and other factors. the transaction to the median value of the range. According to the last paragraph of Article 179 of the As another mechanism for adjusting tax outcomes, ‘‘Invitation Letters’’ are sent to taxpayers who have MITL, Mexico follows the OECD Guidelines for inter- shown irregular behaviors or discrepancies in the in- pretation as long as they do not contradict any local formation declared (informative returns and tax re- legislation, which is very sparse on transfer pricing turns). Through these letters, tax authorities request matters. Therefore, in essence, whatever final regula- information to prove the taxpayer has properly ful- tions the OECD publishes regarding intercompany fi- filled its tax obligations or to spontaneously correct its nancial transactions should be considered in tax situation. While tax authorities maintain that the taxpayers’ analyses. For example, even though Mexico invitation does not imply the start of an audit, it is has not officially adopted Action 4 of the BEPS pro- part of a program of pre-taxation or fact validation, gram, in an audit, tax authorities may request that including omissions, irregularities, or inconsistencies taxpayers prove the reasonableness of receiving a loan previously detected by tax authorities. under a similar set of rules.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 53 3. Besides the determination of whether a 5. Are there any relevant court cases or tax transaction’s interest rate is at arm’s rulings in your country dealing with the length, what other factors does your transfer pricing of intercompany financing country consider in deciding whether the transactions? related party financing is arm’s length The following court case set an important precedent on how an and acceptable overall? Examples of intercompany financing transaction must be conducted and additional factors may include: the criteria used by the tax authorities in similar cases: contractual terms, functions of the In September 1999, Operadora Unefon (‘‘Unefon’’) and companies involved, characteristics of the Nortel Networks Ltd (‘‘Nortel’’) celebrated a financing and companies’ financial products or services, supply contract under which Nortel was to supply a large economic circumstances, or business amount of fixed assets and working capital to Unefon for its op- strategies. erations. Unefon issued a promissory note to Nortel for $349 million in November 2001. In September 2002, Nortel sued In theory, all comparable factors should be considered in deter- Unefon for lack of payment; in response, Unefon sued Nortel mining the arm’s length nature of financial transactions. How- for non-compliance with its obligations. ever, contractual terms are usually the starting point and are Unefon and Nortel reached a settlement and, in June 2003, more relevant to the analysis, and they are certain to be consid- Unefon made an initial payment, reducing its debt to $324 mil- ered by tax authorities in their analysis. Taxpayers are also ex- lion. In the same month, Codisco Investments LLC (‘‘Codisco’’), pected to have an intercompany agreement setting the a third party to Nortel but a related party to Unefon, bought characteristics of the loan (principal, interest rate, credit Unefon’s debt to Nortel for a discounted price of $107 million. rating, currency, term, etc.). The functions of the companies are At this point, Unefon had an account payable to Codisco. likely to be more examined in cases involving cash pool struc- Codisco and Unefon then restructured the discounted debt tures. into a new promissory note for its nominal value ($324 mil- Tax authorities are also increasingly focusing on and chal- lion). In September 2003, Unefon paid off the $324 million debt lenging the purpose and reasonableness of the loan. Taxpayers to Codisco. are expected to show a reasonable basis for the entity’s need for cash at the time of the loan, as well as the use and benefit of the This transaction caught the attention of the tax authorities money. because they viewed the transaction between Codisco and Unefon as having occurred between third parties. Unefon 4. If it is determined that any part of a would have to recognize the income derived from the waiver of debt, amounting to $217 million. related party transaction should not be As a result of a tax audit conducted by the tax authorities and characterized as debt, what are the based on the OECD Transfer Pricing Guidelines, Unefon re- consequences to both the borrower and ceived a tax credit from the tax administration for $217 million the related lender? because had the same transaction occurred with an unrelated party, Unefon would have had a waiver of debt of $217 million Tax authorities will disallow the borrower from deducting any (which is considered accumulative income for Mexican tax pur- interest payments made to a foreign-related party for loans that poses). The court resolved the case in favor of the tax authori- exceed three times the equity of the company (Article 28, Sec- ties because although operations between Nortel-Unefon and tion XXVII of the MITL), whereas this rule does not apply to Nortel-Codisco were carried out between independent parties, loans contracted with local related parties. Unefon participated in the financing restructuring, so the latter Mexico has seen successful cases of unilateral APAs regard- was aware and agreed that the credit rights under its charge ing thin capitalization in which tax authorities allow a higher would be assigned in exchange for a payment of less than one ratio of debt to equity to taxpayers that prove that their busi- third of the original amount of the debt. Under this reasoning ness requires a high level of debt and that comparable third par- and according to the OECD Transfer Pricing Guidelines for ties operate with similar ratios of debt to equity. Multinational Enterprises and Tax Administrations, this type of If a taxpayer determines that its business requires a debt-to- transaction would not be accepted by third parties. equity ratio higher than the one established by the MITL, it may apply for an Advanced Pricing Agreement (APA) request- Moises Curiel is Principal-Director of the Latin American Transfer Pricing ing the tax authorities to increase the allowed ratio and include Practice at Baker & McKenzie in Mexico City; Allan Pasalagua serves as Tax supporting documentation. Counsel at Baker & McKenzie in Mexico City; and Rafael de la Mora is a In order to obtain a thin capitalization APA, a taxpayer must Junior Associate at Baker & McKenzie in Mexico City. submit, among other documents, evidence that all transactions They may be contacted at: with related parties, both domestic and foreign, are in compli- [email protected] ance with the arm’s length principle, including the interest rate [email protected] established in the intercompany loans for which the APA is [email protected] being requested. www.bakermckenzie.com

54 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 The Netherlands Krzysztof (ukosz, Olga Shambaleva, Martin Druga, and Etan Wijnberg Ernst & Young Belastingadviseurs LLP, Amsterdam

1. How does your country identify lated party financing transactions, such as cash pools, and adjust related party financing intragroup guarantees, and intragroup hedging ar- rangements. transactions? What is your country’s The main rule is that the Dutch tax law follows the approach to determining whether civil law characterization of debt, and the starting the debt arising from a related party point of characterization is always the contractual financing transaction should be framework of the transaction (e.g., the loan agree- properly characterized as debt? ment). There are few exceptions to the main rule. According to the CITA, there are certain situations The wider tax and transfer pricing landscape in the where a transfer of funds can be re-characterized Netherlands is formed by the Dutch Corporate from debt into equity when certain specific conditions Income Tax Act (the CITA), OECD Transfer Pricing apply, which include: Guidelines, and the relevant local/regional court prac- q Substance over form principle – The contractual tice. From time to time, the Dutch Ministry of Finance form of the transfer of funds is a loan, but the objec- issues so-called tax decrees, which contain clarifica- tive is to make a capital contribution (so-called tions and guidance on various transfer pricing topics. ‘‘sham’’ loan doctrine). The latest one, Decree no. IFZ 2018/6865, dated April q It is clear from the effective date of the loan that the 22, 2018, was published on May 11, 2018 (the loan will not be repaid (so-called ‘‘bottomless pit’’ ‘‘Decree’’) and includes guidance on transfer pricing loan doctrine). aspects of related party financing transactions. In ad- q The loan can be classified as a participation loan dition, the level of sophistication of the transfer pric- based on the following three criteria (all of which ing environment can be seen in the transfer pricing have to be met to achieve a participation loan classi- positions often taken by the Dutch tax authorities (the fication): DTA) during tax audits. i. The interest rate is profit dependent; Historically, the Netherlands was often chosen by ii. The loan is subordinated; and many multinationals (MNCs) as a jurisdiction to es- iii. The loan does not have a repayment date or ma- tablish holding and/or intermediary financing compa- turity longer than 50 years. nies. One of the reasons for this is the beneficial wide However, it is impossible to re-characterize equity double tax treaty (DTT) network, together with the into debt when civil law clearly states that the transfer Dutch participation exemption regime which offers of funds is equity. the possibility for obtaining tax certainty through uni- In the Netherlands, intercompany loans are subject lateral and bilateral APAs. The Dutch Ministry of Fi- to the arm’s length test. According to Dutch court nance issued several decrees addressing specific practice (decisions by the Supreme Court) and the requirements for these types of companies in terms of Decree, if an independent third party would not have sufficient local substance and arm’s length remunera- been prepared to provide the same loan to the borrow- tion. Nowadays, the trend shows that as a result of the ing group company under the same conditions and in maturity of financial markets, overall healthy invest- the same circumstances, it is assumed that the lender ment climate, and quality of labor, more and more has taken on risks that a third party would not have MNCs tend to select the Netherlands as the target lo- accepted. In this instance, it will be assumed — sub- cation for their more complex intercompany financ- ject to extraordinary circumstances — that the lender ing and wider treasury functions. This results in the has accepted the risk with the intention of serving the DTA gaining a deeper and more diverse expertise in interest of its affiliated company in the capacity of a analyzing and challenging different types of related shareholder or associated company/subsidiary (and party financing transactions. the loan will be referred to as a non-businesslike The following consideration and response will now loan). The Decree provides specific guidance on how focus on Question 1, with respect to related party loan to determine an interest rate (for tax purposes) in transactions. Please note, however, that current trans- cases of non-businesslike loans. fer pricing policy, as well as controversy trends and The test of the businesslike nature of the loan developments in the Netherlands, touch upon transfer should take place both at the effective date and during pricing aspects of essentially all common types of re- that loan’s term, effectively serving as a continuous

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 55 test. If the borrowing group company has an insufficient credit 3. Besides the determination of whether a rating (i.e., below BBB-), the taxpayer has the burden of proof transaction’s interest rate is at arm’s to demonstrate that a particular loan has been agreed upon length, what other factors does your under arm’s length conditions and could be classified as busi- nesslike. In this respect, the Decree states that only in excep- country consider in deciding whether the tional situations would an independent lender be prepared to related party financing is arm’s length accept a credit rating of the borrower lower than BBB- (and we and acceptable overall? Examples of note that the DTA may deem banks/bond investors as not com- additional factors may include: parable to corporate lenders, as the former do diversify risks, contractual terms, functions of the which may not necessarily be the case for the latter). companies involved, characteristics of the If a Dutch borrower is unable to demonstrate the business- companies’ financial products or services, like character of the intercompany loan, for both effective date economic circumstances, or business and lifetime of the loan, the Dutch borrower may be required strategies. to apply a lower interest rate. Such a rate would be based on the lender’s or the group’s rating, or in some cases even a risk-free The general Dutch transfer pricing provisions (Article 8b CITA) rate – if the group itself is of non-investment grade. emphasize the importance of the five comparability factors that should be considered when establishing an arm’s length inter- In summary, when dealing with related party financing trans- est rate for a related party loan transaction. actions in the Netherlands, it is important to take all of the Historically, transfer pricing aspects of financing transac- above specific rules into account, especially with regard to re- tions were assessed mostly from a one-sided (i.e., a borrower’s) characterization of debt into equity.. It should also be noted perspective; however, this approach is changing. The recent that the concept of accurate delineation of debt is increasingly Decree promotes a two-sided approach (i.e., both the borrow- becoming a subject of recent Dutch transfer pricing contro- er’s and lender’s perspectives) when delineating related party fi- versy cases. nancing transactions and determining interest rates by taking into account additional factors (such as substance and control over risks). Moreover, as described in the Decree, the stand- 2. What rules or guidance exist in your alone credit rating of a group company and the group rating di- country to determine the arm’s length rectly affect an arm’s length interest rate. interest rate for a related party financing Today, the Dutch transfer pricing controversy regarding re- transaction? lated party financing transactions now focuses on a wider range of aspects, for instance, the correct delineation of finan- The Decree states that the creditworthiness of a borrower can cial transactions (e.g., the appropriateness of tenors in cash be expressed as a credit rating. Based on the credit rating, a pooling deposits and loans), commercial rationale, and eco- borrower can be considered either investment grade or non- nomic reality. This often includes tax assessments based on ‘‘re- investment grade (where the credit rating of the borrower is constructing’’ the actual formal terms and conditions of a lower than BBB-). It is recognized that only in exceptional situ- tested related party financing transaction. ations would an independent lender accept a borrower with a non-investment grade credit rating. 4. If it is determined that any part of a The Decree further elaborates on the subject of implicit sup- related party transaction should not be port and mentions that in case of implicit support there should characterized as debt, what are the not be any remuneration. The Decree does not give any specific consequences to both the borrower and guidance with regard to benchmarking interest rates. However, the related lender? it does mention various approaches that are being used and ac- cepted in practice for the purposes of benchmarking interest If a Dutch entity provides a loan to an affiliated entity and the rates, such as external CUPs based on bonds and loans, internal loan is re-characterized into equity, the interest income can be CUPs, approaches based on the costs of funds, and ‘‘synthetic’’ viewed as a capital contribution and in that case, will not be in- CUPs. It is important to note that non-binding bank quotes are cluded in the profit if it qualifies under the participation exemp- considered insufficient as benchmark interest rates. tion (this includes the exemption from taxation of a shareholder in a company on dividends received and potential In summary, given the formal requirements and best prac- capital gains resulting from the sale of shares). If an affiliated tices followed by the DTA with respect to related party financ- entity provides a loan to a Dutch entity and the loan is re- ing transactions, taxpayers should be prepared to substantiate characterized into equity, the interest costs will be non- the transfer pricing positions taken. deductible.

56 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 It is also important to mention that as a part of the recent mination of that interest rate. Based on this case, the question Dutch court practice, a so-called ‘‘non-businesslike’’ loan doc- of whether there is a businesslike loan can be answered. trine was developed by the Dutch tax authorities. As briefly ex- q Supreme Court 1 March 2013, no. 11/01985 – Under the plained above, the concept involves the question of whether a guarantee of a so-called umbrella credit facility, one company particular intragroup loan would be granted by a third party accepts joint and several liability for all the debts of other under similar circumstances. companies participating in the credit arrangement between q If yes, then the loan would be considered a ‘‘businesslike’’ that company and the other companies. The ruling was on the loan; thus, no interest deductibility restrictions would apply. deductibility of a loss suffered following default under a cross-guarantee agreement. Under the conditions specified in q If no, then another question arises as to whether the inap- this ruling, companies entering into such an agreement are propriate credit risk of the lender could be compensated for accepting a larger risk than the risk they would enter into in by increasing the interest rate. stand-alone loan agreements, and therefore the losses suf- I. If yes, then that correction can be made via the interest fered cannot be deducted. rate, and the additional interest should be imputed. q Supreme Court 17 October 2014 no. 14/00955, II. If no, then a correction is not possible by imputing addi- ECLI:NL:HR:2014:2984 – This case was regarding a re- tional interest, and the loan is considered a ‘‘non-businesslike’’ course claim. The question that was posed was whether the loan. The consequence of this characterization is that the inter- non-businesslike loan jurisprudence is applicable to a re- est rate shall be deemed equal to the interest rate that the course claim. The Supreme Court ruled that it was applicable debtor would have paid to a third party for a similar loan with in this case. a guarantee from the creditor. q Supreme Court 20 March 2015, BNB 2015/141 – This case Given the specific Dutch requirements in this area, extra care specifies that the burden of proof with regard to the loan be- should be taken by taxpayers when delineating the related coming non-businesslike during the term of the loan, is on the party financing transactions. tax inspector and not on the taxpayer. q Supreme Court 5 January 2018, nr. 16/01047, BNB 2018/60 – A participating loan was being assessed to deter- 5. Are there any relevant court cases or tax mine whether the loan should be considered equity or debt. rulings in your country dealing with the The court in this case held that the characterization of a loan transfer pricing of intercompany financing cannot be assessed solely based on the material aspects of the transactions? loan. q High Court Arnhem-Leeuwarden12 June 2018 Below, we briefly outline some of the most relevant examples of ECLI:NL:GHARL:2018:5362 – The Dutch tax inspector took Dutch court practice to be considered when determining the position that a loan should be re-characterized into a par- and/or substantiating a remuneration under related party fi- ticipating loan based on its material characteristics. Accord- nancing transactions. The court cases and decisions are listed ing to the tax inspector, when profit dependency criteria are in chronological order. tested materially, the interest can be formally fixed in the con- q Supreme Court 31 May 1978, nr. 18 230, BNB 1978/252 tract, but there could also be a clause in this contract allow- and 9 May 2008, nr. 43 220, BNB 2008/198 – These cases are ing the company to postpone the interest when the company groundbreaking with respect to the differentiation between has low profits. The inspector was also of the opinion that al- informal capital contributions and intercompany loan remu- though a fixed interest was agreed upon (the formal ap- neration. The Supreme Court ruled in this case that interest proach), the interest was in fact profit dependent (the should not be imputed on the non-interest bearing loan, as it material approach). The Court of Appeal ruled against the should be considered an informal capital contribution. Dutch tax inspector. The High Court based its decision on a q Supreme Court 20 July 2002, BNB 2002/23– Tax law has case from the Dutch Supreme Court from January 5, 2018 three exceptions in following the characterization of loans of (BNB 2018/60). In that case, the Supreme Court ruled that in civil law in fiscal law. The exceptions are described in this qualifying a participating loan, it should be done based on case. Also, please refer to our answer to question 1, above, for what has been agreed upon, and the Court rejected the the description of the three exceptions. material/substance over form test. q Supreme Court 5 November 2011, BNB 2012/37 – This Developments in Dutch case law show that the DTA some- case answers the question of what should be considered an times takes a more conservative approach with taxpayers in arm’s length interest on a non-arm’s length loan. The Dutch cases of related party financial transactions, compared to other non-businesslike loan doctrine was introduced in this case. ‘‘standard’’ related party transactions. Nevertheless, as a result The concept entails whether the particular intragroup loan of the constantly changing tax environment in the recent would be granted by a third party under similar circum- period, the DTA is still open to a dialogue with the taxpayers in stances. The steps needed to determine whether the interest order to provide an advance tax/transfer pricing certainty (i.e., related to the loan is deductible were not discussed by the through bilateral or multilateral advance pricing agreements) Court. and avoid potential controversy in the future. q Supreme Court 25 November 2011, no. 08/05323 – This Krzysztof 2ukosz is an Associate Partner, Olga Shambaleva is a Senior case raised the question of whether an intragroup loan could Manager, Martin Druga is a Senior Consultant, and Etan Wijnberg is a be depreciated in domestic relationships. The Supreme Court Consultant at Ernst & Young Belastingadviseurs LLP,Amsterdam, held that if the interest has not been determined in accor- Netherlands. dance with the arm’s length principle with regard to a loan be- They may be contacted at: [email protected] tween intragroup entities, for tax purposes, the profit [email protected] calculation must be based on an interest rate that does meet [email protected] this principle. The conditions under the non-businesslike [email protected] loan doctrine must be taken as a starting point for the deter- www.ey.com/nl/en/home

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 57 New Zealand Leslie Prescott-Haar and Sophie Day TP EQuilibrium | AustralAsia LP

1. How does your country identify For income years prior to July 1, 2018, New Zea- and adjust related-party financing land’s transfer pricing legislation was contained in prior sections GC 6 to GC 14 of the ITA. The provisions transactions? What is your country’s in place prior to July 1, 2018 did not include any spe- approach to determining whether cific requirements with respect to intercompany fi- the debt arising from a related- nancing transactions. Under the old regime, typical party financing transaction should arm’s length debt pricing analyses had historically be properly characterized as debt? been acceptable; however, there were a considerable number of disputes in relation to notching for implicit For income years beginning on or after July 1, 2018, parent support, which the 2018 legislative changes section GC6(3) of the Income Tax Act 2007 (‘‘ITA’’), as squarely address. amended by the Taxation (Neutralising Base Erosion Except when certain specific statutory provisions and Profit Shifting) Act 2018 (‘‘BEPS Act’’), provides apply, it is not common in New Zealand for intercom- the following requirements for identifying whether a pany debts to be re-characterized by the Inland Rev- transaction should be regarded as a related-party fi- enue (‘‘IR’’) as equity for tax purposes based on nancial arrangement and therefore be subject to the ‘‘substance over form’’ or similar concepts. However, transfer pricing rules: in some specific cases, the 2007 ITA, as amended by (a) A nonresident person (the lender) provides the BEPS Act, expressly requires IR to make the dis- funds to another person (the borrower) when: tinction for tax purposes; a stapled debt security is one i. The lender and borrower are associated persons; such example. A stapled debt security is a debt secu- rity that is stapled to a share (not being a fixed-rate ii. The person or group of persons has a total owner- share) that can only be disposed with the share. The ship interest, determined under sections FE 38 to stapled debt is to be treated as equity and any interest FE 41 (which provide for the measurement of own- payable as a dividend. ership interests in companies), of 50% or more in each of the lender and borrower; iii. The funding is provided through an indirect asso- 2. What rules or guidance exist in ciated funding arrangement described in subsec- your country to determine the arm’s tion (3)(C); length interest rate for a related iv. The lender is a member of a nonresident owning party financing transaction? body or a group of nonresidents who act in concert and are each described in section FE 2(1)(a) to (b), Prior to the passage of the BEPS Act, IR’s approach to and the members of the nonresident owning body credit rating estimation and debt pricing was gener- or group have a total ownership interest, deter- ally based on Standard & Poor’s Group Rating Meth- mined under sections FE 38 to FE 41, of 50% or odology (November 2013). As indicated in the more in the borrower; and response to question 1, for income years beginning on or after July 1, 2018, the BEPS Act introduced interest (b) An expenditure arises for the borrower for limitation rules, under sections GC 15 to GC 19 of the which the borrower is allowed a deduction. 2007 ITA, that apply to inbound loans only. The legis- New Zealand’s cross-border related-party borrow- lation determines the credit rating of a borrower ing legislation is contained in sections GC 15 through based on statutory provisions for the purposes of es- GC 19 of the Income Tax Act 2007 (‘‘ITA’’), as amended tablishing an arm’s length interest rate on inbound 2 by the BEPS Act, and applies to income years begin- loan transactions. ning on or after July 1, 2018.1 Section GC 15(1) of the Under the new interest limitation transfer pricing ITA indicates that where an adjustment is required rules, a ‘‘stepped approach’’ is used for determining under sections GC 15 to GC 19 (i.e., an adjustment is the applicable credit rating for purposes of required for the credit rating of the borrower and/or establishing/reviewing the spread applied in an inter- the conditions of the financial arrangement), sections company financial arrangement, leading to one of the GC 7 through GC 14 of the ITA apply to the transfer following assigned credit ratings for the borrower’s in- pricing arrangement. debtedness:

58 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 q Default credit rating – Equivalent to the credit rating that ditions include payments in kind, interest payment deferral the borrower has for long-term senior unsecured debt or, in beyond 12 months, controllable interest rate or principal repay- the absence of such, the credit rating the borrower would ment contingency terms, tenors exceeding five years, and sub- have under an arm’s length analysis. This default rating is ap- ordination. plicable only if the other potential ratings are neither required The revised transfer pricing provisions now also contain a re- nor elected; or quirement for taxpayers to evidence that the legal form of the q Restricted credit rating – The credit rating of a borrower financing transaction is consistent with its economic sub- that is controlled by either a nonresident coordinated group stance, following in the footsteps of legislative changes in Aus- or a group acting in concert is equivalent to the higher of: tralia in 2013. q BBB-, or an equivalent rating assigned by a ratings agency; or q The credit rating the borrower would have if its New Zealand 4. If it is determined that any part of a group had a debt percentage below 40%, or its actual debt per- related-party transaction should not be centage if below 40%; or characterized as debt, what are the q Group credit rating – The credit rating of a high BEPS-risk consequences to both the borrower and borrower is equivalent to the higher of: the related lender? q The rating of the worldwide group member with the highest level of long-term senior unsecured debt, minus 1 notch (if The IR website indicates, in particular, ‘‘[W]here a loan transac- below BBB+) or 2 notches (if BBB+ or above); or tion would not have taken place in the open market, then the q The credit rating determined under an arm’s length analysis commerciality of the financing arrangement between associ- 3 for long-term senior unsecured debt; or ated parties may be called into question.’’ The new transfer q Optional credit rating – If elected, the credit rating of a bor- pricing rules requiring arm’s length conditions for cross-border rower is equivalent to the rating on, or the rating correspond- related borrowing will apply to the transaction if it does not sat- ing to the interest rate on, existing long-term senior isfy the arm’s length standard and, in extreme cases, the anti- unsecured debt of the borrower or its New Zealand group avoidance rules (GAAR) will be applied by the IR. The new with third parties, applicable for up to four times the amount transfer pricing legislation contained in GC 18 of the ITA re- of related-party debt. garding various exotic features will also apply to transactions which may otherwise attract GAAR scrutiny. An administrative safe harbor with an interest rate/spread The IR has undertaken to review all inbound loans over NZD cap applies to indebtedness below NZD 10 million. In general, 10 million and outbound loans of all sizes where the interest for loans of less than NZD 10 million, IR considers 300 basis rate is low or zero, or where no fees are charged for the guaran- points (3.0%) above the relevant base indicator rate to be tees provided. broadly indicative of an arm’s length rate, an increase from the previous guidance of 250 basis points (2.5%). This guidance ap- Inbound NZ borrower context: If an arrangement is not debt, plies beginning on July 1, 2018, and the next review of interest then no interest deduction is allowed, and potentially differing rates for small value loans is scheduled for June 30, 2019. For withholding tax levels apply to the distribution made thereon loans exceeding NZD 10 million, IR expects more science and (dividend withholding tax vs. interest withholding tax under benchmarking to support the interest rates applied. Generally, the domestic law rate (if the counterparty is not in a DTA coun- a related-party loan with the same interest rate that the borrow- try) or at the rate prescribed by the DTA). If the lender is out- er’s foreign parent comparably incurs will be accepted as arm’s side New Zealand, then the laws of the lender’s jurisdiction length. regarding taxation of interest and dividends apply. Outbound NZ lender context: If an arrangement is not debt, 3. Besides the determination of whether a then distributions are regarded as dividend income, which is transaction’s interest rate is at arm’s taxed in New Zealand but with foreign tax credits for withhold- length, what other factors does your ing taxes. Potentially differing withholding tax levels apply to distributions made thereon (dividend withholding tax vs. inter- country consider in deciding whether the est withholding tax under the domestic law rate of the other related-party financing is arm’s length and country (if the counterparty is not in a DTA country) or at the acceptable overall? Examples of rate prescribed by the DTA). If the borrower is outside New additional factors may include: Zealand, then the laws of the borrower’s jurisdiction regarding contractual terms, functions of the taxation of interest and dividends apply. companies involved, characteristics of the companies’ financial products or services, 5. Are there any relevant court cases or tax economic circumstances, or business rulings in your country dealing with the strategies. transfer pricing of intercompany financing transactions? Section GC18 of the ITA, as amended by the BEPS Act, intro- duces rules regarding loan features that are disregarded for New Zealand’s courts have not rendered any decisions that deal the purposes of pricing such cross-border financial arrange- with the transfer pricing of intercompany financing transac- ments. Terms and conditions (‘‘exotic features’’) that could tions and, hence, no local case law precedent exists. Although result in an excessive interest rate paid to offshore related par- various disputes regarding controlled financial transactions ties must be ignored for spread/margin pricing purposes, have been heard within the IR’s adjudication process and in unless the taxpayer can demonstrate equivalent third-party competent authority cases, those decisions have not been made debt featuring such terms and conditions, subject to complex public. The IR is currently in the process of finalizing its final calculations. Examples of typically disregarded terms and con- guidance on financial transactions under the current law.4

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 59 IR has indicated that in its current work program it is paying particular attention to the following major tax risks:5 Leslie Prescott-Haar is the Managing Director of TP EQuilibrium | q inbound loans over NZD 10 million; AustralAsia LP (TPEQ), and Sophie Day is an Analyst at TPEQ. They may be contacted at: q all outbound loans; [email protected] q credit ratings that are the equivalent of Standard & Poor’s [email protected] BB or lower; www.worldtransferpricing.com/New-Zealand/TP-Equilibrium.html q cash pooling arrangements; and q exotic financing, such as hybrid instruments and long-term subordinated debt facilities. NOTES 1 See also our responses to questions 2 and 3. The newly enacted rules will have the most significant impact 2 In August 2018, IR released draft guidance concerning key provi- on taxpayers with loans exceeding NZD 10 million, where there sions of the BEPS Act and is currently seeking public feedback. is a high BEPS risk. Typically, IR will find that there is a high 3 https://www.ird.govt.nz/international/business/transfer-pricing/ BEPS risk when: (1) there is a high leverage ratio, i.e. a debt transfer-pricing/practice/transfer-pricing-practice-financing- percentage exceeding 40%; or (2) the lender is located in a low costs.html. tax rate jurisdiction, i.e. where there is a tax rate of less than 4 Refer to our response to Question 2. 15%. 5 id.

60 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Portugal Patrı´cia Matos and Sofia Margarida Jorge Deloitte & Associados SROC, SA

1. How does your country identify As such, the PTA cannot just disregard the assump- and adjust related party financing tions and analyses carried out by the taxpayer in order to perform the adjustment, but rather must demon- transactions? What is you country’s strate its position with unassailable robust and techni- approach to determining whether cally comparable elements that rebut the economic the debt arising from a related party studies presented by the taxpayer. financing transaction should be Given the specific framework of Portuguese transfer properly characterized as debt? pricing rules, the dichotomy between the proper char- acterization of a transaction as debt or capital is a Based on our experience, in Portuguese transfer pric- complex subject. In fact, although it is common in ing practice, intragroup financing transactions are other countries, the Portuguese transfer pricing rules usually identified through a set of accounting/tax in- do not allow the recharacterization of transactions in formation annually prepared by the taxpayer (e.g., the the context of a transfer pricing adjustment. company’s financial report, the corporate income tax As such, whenever the PTA analyzes an intragroup return, the accounting and tax return, and also financing transaction and concludes that the transac- through transfer pricing documentation from both tion is not being properly characterized, the PTA the reporting and related entities). cannot apply the transfer pricing rules to make an ad- Transfer pricing adjustments to intragroup financ- justment. For this purpose, the general anti-abuse rule ing transactions are typically performed in the context (‘‘GAAR’’) applies, and it has different preconditions of tax audits conducted by the Portuguese Tax Au- and requirements for its application. thorities (‘‘PTA’’). During a tax audit, the PTA usually On the other hand, in assessing whether an intra- requests transfer pricing documentation prepared by group financing transaction should be characterized the taxpayer and other supporting information for the as debt, the PTA will usually analyze, in the context of transactions executed during the year(s) under audit. the audit, the taxpayer’s financial ratios, such as in- The information provided by the tax payer is used to debtedness and solvency ratios, to assess if the ex- identify the terms and conditions underlying the ecuted financing transactions have an underlying transactions. market rationale. In the context of a tax audit, the PTA may conclude Notwithstanding the above, for financing transac- that the terms and conditions underlying an intra- tions carried out by permanent establishments, the group financing transaction do not comply with the PTA typically requests the taxpayer to demonstrate arm’s length principle. In that case, a transfer pricing that the capital levels assumed by the permanent es- adjustment may be needed to determine the correct tablishment are in line with the market behavior. In taxable income for that fiscal year. situations where the taxpayer did not previously de- To carry out any proposed adjustment, the PTA velop such an analysis, the PTA may conduct an analy- would present a tax audit report setting out the sis of the permanent establishment’s ‘‘free capital’’ grounds for determining that the transaction under levels to ensure that debt levels are in accordance with analysis is not in accordance with arm’s length prin- the market behavior. ciple. For this purpose, there is a need for proper dem- onstration of the deviations identified between the defined terms and conditions and the market behavior 2. What rules or guidance exist in by applying transfer pricing methodologies provided your country to determine the arm’s by Portuguese transfer pricing rules, which are in line length interest rate for a related with the OECD Guidelines. party financing transaction? Additionally, it should be noted that if the taxpayer has demonstrated in its transfer pricing documenta- The Portuguese transfer pricing regime does not pro- tion or during the tax audit that the transaction com- vide specific criteria for analyzing financing transac- plies with the arm’s length principle, the burden of tions. Therefore, general rules for determining proof is on the PTA, which must rebut the economic compliance with the arm’s length principle apply. analysis performed by the taxpayer by stating the rea- Nevertheless, the Portuguese Ministerial Order no. sons for its non-compliance with the market behavior. 1446-C/2001 (‘‘Ministerial Order’’) provides an explicit

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 61 reference to the OECD Transfer Pricing Guidelines for Multina- Hence, it should be noted that in order to ensure the accept- tional Enterprises and Tax Administrations in interpreting the ability of a financing transaction in Portugal from a transfer rules. As such, it is possible to assert its subsidiary application pricing perspective, the taxpayer should increasingly adopt a to determine the applicable methodology for assessing the in- holistic approach in the analysis presented, granting proper tragroup interest rate for compliance with the arm’s length analysis not only to the interest rate applied but also the op- principle. tions realistically available for both parties in the transaction. Accordingly, in anticipation of the approval of the final ver- For example, to demonstrate that the financing transaction is sion of the OECD discussion draft on financial transactions, it at arm´ s length from the lender’s perspective, the taxpayer is possible to consider its applicability in Portugal. Such a should be able to show that granting a loan to a related entity is report should be taken into account as a guideline for both the a better alternative than applying that amount on the market taxpayer and the PTA regarding these kinds of intragroup (for example, on a deposit). On the other hand, from the transactions. borrower´s perspective, it should be ensured that the terms and On the other hand, despite the lack of specific legislation and conditions of the intragroup transaction are not worse than the guidance provided by the PTA on intercompany financing terms and conditions that could be offered by third parties in transactions, the Portuguese Tax Courts have been providing the market. additional guidance about the criteria that should be adopted by the taxpayers or the PTA in conducting transfer pricing 4. If it is determined that any part of a analyses for different types of intragroup financing transac- tions. related party transaction should not be characterized as debt, what are the For example, with respect to shareholder loans, different court rulings have emphasized that a proper analysis of the in- consequences to both the borrower and terest rate applied for this type of transaction must take into ac- the related lender? count criteria, such as the start date of the transaction, the guarantees underlying the financing transaction, and the matu- As discussed above, the recharacterization of an intragroup rity date, as well as the activities of the borrower and lender. transaction is not possible under the Portuguese transfer pric- ing regime and should be performed under the GAAR, as pro- It should also be stressed that the Portuguese Corporate vided in the Portuguese General Tax Law. Income Tax Code (‘‘CIT’’) has a rule that specifies that any inter- est borne by the taxpayer with respect to shareholder loans is Therefore, if the PTA moves forward with recharacterizing tax deductible up to the interest resulting from the application an intragroup financing transaction as debt through applica- of an interest rate legally defined by a Ministerial Order (corre- tion of the GAAR, it would not lead to a correlative adjustment sponding to the floating rate – EURIBOR + spread). This rule, for transfer pricing purposes, which means that the impact of albeit not specifically linked to the transfer pricing rules, may such an adjustment will only be reflected on one of the parties serve as a safe harbor for low-risk intragroup financing trans- involved in the transaction. actions. Given the above, and considering the main consequences that may arise in the event the PTA disregards a financing trans- action as debt, such a correction will typically be assessed on 3. Besides the determination of whether a the borrower’s sphere. The impacts on the borrower´s perspec- transaction’s interest rate is at arm’s tive may lead to the disregard of the deductibility of the costs length, what other factors does your incurred in relation to such a transaction for tax purposes, country consider in deciding whether the namely the interest paid over the amount granted and other related party financing is arm’s length costs that may be associated with it (guarantee payments and and acceptable overall? Examples of other related expenditures). additional factors may include: From the lender’s perspective, the recharacterization of a fi- nancing transaction as a capital contribution may result in a re- contractual terms, functions of the duction of profits to the extent that it would not be possible to companies involved, characteristics of the recognize the earnings from the interest owed by the borrower. companies’ financial products or services, However, if the lender has incurred costs with third parties to economic circumstances, or business carry out the intercompany financing transaction that was sub- strategies. sequently disregarded as debt, the PTA may argue that the costs incurred by the lender regarding such financing should not be Recently, both the PTA and the Portuguese Tax Courts (espe- tax deductible. It should be mentioned, however, that there is cially the Tax Arbitration Court) have been giving increasing no consensus on this situation among the Portuguese courts. relevance to assessing the economic rationale underlying the intragroup transaction. Thus, the taxpayer should demonstrate that the interest rate applied in the financing transaction is in 5. Are there any relevant court cases or tax accordance with the market behavior (adopting the compara- rulings in your country dealing with the bility criteria described in the answer to the previous question) transfer pricing of intercompany financing and also provide evidence that an independent agent under the transactions? same economic circumstances would enter into a similar trans- action. As previously discussed, in the last few years intercompany fi- In fact, the substance of the transaction has been emphasized nancing transactions have been triggering an increasing over its contractual drafting, so an economic analysis that is number of disputes between taxpayers and the PTA that must only focused on demonstrating that the applied interest rate is be settled by the tax courts. at arm’s length may be insufficient to assess the transaction as In this regard, it is important to stress the Tax Arbitration being acceptable, from a tax perspective. Court’s key role in these disputes, having issued relevant deci-

62 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 sions about transfer pricing disputes on intercompany financ- From the taxpayer’s perspective, the interest rate applied in ing transactions, some of which we would like to highlight: the intercompany financing transaction was justified by the q Ruling about comparability criteria - use of internal vs. higher risk inherent to the activities of the borrower company external comparable transactions (Tax Arbitration Court and the level of seniority and subordination of the transaction. process no. 733/2015-T) – In this case, the PTA contested the During the tax audit, the taxpayer also presented a benchmark- comparable transactions that were selected by the taxpayer to ing analysis which determined that the interest rate applied assess the arm’s length behavior of the shareholder loan the was arm’s length. taxpayer received on the grounds that there were internal The PTA disagreed with the taxpayer’s arguments, stating comparable transactions available, although the taxpayer had that: i) the transactions executed with the funds obtained applied the external comparable uncontrolled price method. through the shareholder loan did not have a high inherent risk (the funds were applied in investments on real estate assets that In the PTA’s view, the external comparables selected by the were typically acquired at lower prices) and ii) the benchmark- taxpayer did not meet the requirements in Portuguese transfer ing study presented by the taxpayer was not suitable for dem- pricing rules, nor did they provide the highest degree of compa- onstrating the arm’s length behavior since the criteria adopted rability between the controlled transaction (shareholder loan) (selection of subordinated and speculative debt, among others) and other non-related transactions, as a wide spectrum of dif- did not ensure the highest comparability degree, as requested ferent entities generated a wide statistical market range which by transfer pricing rules. did not comply with the arm’s length principle. To that end, the PTA applied the CUP method by using an ex- Thus, the PTA selected an internal bank loan granted to the ternal comparable, having collected data from the Portuguese taxpayer as the most comparable transaction and performed Central Bank and computed the annual average interest rate on the transfer pricing adjustment based on the difference be- corporate loans during the year under review. Based on the av- tween the interest rate applied in that transaction and the one erage rate obtained, the PTA adjusted the shareholder loans. defined in the intragroup transaction. As per the Court’s view, it is clear that the use of an average interest rate, as published by the Portuguese Central Bank, to In turn, the taxpayer argued that the criteria applied in the assess the arm’s length behavior of the interest rate executed in selection of comparable transactions were intended to restrict a shareholder loan operation did not fully satisfy the transfer the results to transactions with characteristics as close as pos- pricing comparability requirements for intragroup transac- sible to the intragroup transaction under analysis, and the fact tions, as set out in the Portuguese transfer pricing regime. that the contractual interest rate on the shareholder loan was Indeed, the criteria to be adopted to assess the arm’s length within a market range restricted the need to make adjustments. fulfillment of such transaction needed to distinguish short-, The Court ruled that there was a dissimilarity between the medium-, and long-term transactions; guaranteed vs. unse- shareholder loans and the bank loans used as an internal com- cured transactions; subordinated debts vs. senior debts; and fi- parable transaction by the PTA with regard to the degree of the nancing of risk and aggravated risk activities; among others. lender’s protection, as the shareholder loans had no special Thus, the Tax Arbitration Court stated that the transfer pricing guarantee and had their credit subordinated to all other cred- adjustment was not grounded in an economic analysis that ful- its. On the other hand, the bank loan had a set of specific guar- filled the comparability criteria and included substantially dif- antees, and the credit involved appeared to be endowed with ferent transactions with relevant economic and financial seniority. The Court also ruled that it is necessary to ascertain, characteristics that were different from those of the operations, through a functional analysis of the transaction, not only the collateral, and risk of the creditor. management risk but also the financial capacity to assume the Given the above rulings, in our opinion the most recent tax risk and the power of control over it. court decisions about financing transactions conclude that in In light of the above, the Court held that the bank financing analyzing intragroup financial transactions for transfer pricing interest rate used by the PTA, given the terms and conditions of purposes, the following drivers are essential: the transaction, was unacceptable as a comparable for the q Comparability factors shareholder loans due to a lack of identity or analogy in sub- q Context in which the transactions were executed stantial terms, failing to meet the comparability factors deter- In the last few years, there have been additional relevant de- mined by the local transfer pricing dispositions. cisions about other types of intercompany financing transac- q Ruling on comparability criteria applied to shareholder tions (such as cash-pooling) in which the court emphasized the loans (Tax Arbitration Court process no. 378/2017-T) – relevance of the functional analysis of the transactions and de- The taxpayer appealed to the Tax Arbitration Court to contest termination of the comparability factors, such as maturity the PTA’s additional corporate income tax assessment, disre- dates, amounts, exposures, collaterals, and roles of the parties, garding as a deductible cost, part of the interest paid by the for the economic analyses of those transactions. taxpayer on a shareholder loan. The PTA stated during the tax audit that the interest rate applied was not arm’s length and Patrı´cia Matos is a Partner and Sofia Margarida Jorge is a Manager at Deloitte Lisbon, Portugal. that the benchmarking studies presented by the taxpayer to They may be contacted at: demonstrate the alignment with the market behavior did not [email protected] take into account the specific economic circumstances of the [email protected] transaction. www2.deloitte.com/pt/pt.html

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 63 Russia Evgenia Veter, Stepan Kalyuzhnyy, and Yuriy Mikhailov Ernst & Young, Moscow

1. How does your country identify actions in question and accrue additional taxes, and adjust related party financing penalties and late payment interest. transactions? What is you country’s Proper characterization of a transaction is one of the key elements in performing a TP analysis, with the approach to determining whether Russian tax authorities increasingly applying a sub- the debt arising from a related party stance over form approach during both special TP financing transaction should be audits and general tax audits. While this does not nec- properly characterized as debt? essarily lead to re-characterization of transactions for TP purposes, it may affect the way the arm’s length The Russian Tax Code identifies general criteria to de- price is determined. Related party financing transac- termine if transactions between related parties are tions, in particular international financing transac- controlled for Russian transfer pricing (‘‘TP’’) pur- tions, have historically been the focus of attention for poses (transactions between unrelated parties may the Russian tax authorities, and the recent court prac- also be treated as controlled transactions under cer- tice indicates that the tax authorities will continue to tain conditions). These general criteria apply for all challenge financing arrangements using a variety of types of transactions, including financing transac- approaches, not necessarily directly related to TP. One tions. of the approaches is the re-characterization of a trans- At a very high level, to determine whether a transac- action from debt financing to equity financing, based tion would be considered controlled, one needs to de- on the substance of the situation and the facts and cir- termine: cumstances surrounding it. These challenges are q whether the total amount of income received by often based on the concept of an unjustified tax ben- both counterparties on all transactions with each efit (introduced recently in the Tax Code (Article other in a given calendar year exceed certain thresh- 54.1)), which may be applied with a certain degree of olds that vary based on where the counterparties are subjectivity. located and whether they are related; and In addition, the Russian Tax Code contains specific thin capitalization provisions that limit the interest q whether one of the counterparties applies a special deduction on the portion of debt that economically tax regime or tax incentives or is subject to a special has the nature of equity. tax levied on mining industry participants. A more detailed description of these provisions is The Russian Tax Code also provides a number of ex- provided below. emptions with regard to TP control, most of which are also applicable to financing transactions. The follow- ing financing transactions are explicitly exempt from 2. What rules or guidance exist in TP control: your country to determine the arm’s q Interbank loans/deposits with a tenor of up to 7 length interest rate for a related days; party financing transaction? q Sureties/guarantees, if all the parties to such deals The Russian Tax Code provides that the common TP are Russian non-banking organizations; and methods prescribed in the TP section should be ap- q Interest-free loan transactions concluded between plied if there are no specific provisions prescribed by related parties, if all the counterparties and benefi- the other parts of the Tax Code applicable to a trans- ciaries of such transactions are registered or reside action. in Russia. Article 269 of the Russian Tax Code contains spe- Based on the above criteria, if the transactions are cific provisions applicable to financing transactions. It considered controlled from a Russian TP perspective, states that if the interest rate on a controlled financing the Tax Code requires that the terms of these transac- transaction falls within the ‘‘safe harbor’’ thresholds tions are set at arm’s length. If the Russian tax au- established by Article 269 of the Russian Tax Code, no thorities successfully prove that the terms were not set further TP analysis is required. If the interest rate at arm’s length, and as a result, there is an underpay- does not fall within the safe harbor range (i.e., if the ment of tax, they may adjust the pricing of the trans- interest rate at which interest income is accrued is

64 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 lower than the lower limit of the range or the interest rate at The determination of the safe harbor range depends on the which interest expense is accrued is higher than the upper limit currency in which the debt is nominated and is currently set as of the range), then the general TP methods should be applied to follows: identify an arm’s length range of interest rates.

Currency of Debt Lower Limit Upper Limit Rubles 75% of the key rate of the Central Bank 125% of the key rate of the Central of Russia Bank of Russia Euro EURIBOR + 4% EURIBOR + 7% Chinese Yuan SHIBOR + 4% SHIBOR + 7% Pounds Sterling LIBOR + 4% LIBOR + 7% Swiss Francs LIBOR + 2% LIBOR + 5% Japanese Yen LIBOR + 2% LIBOR + 5% Other (including US$) LIBOR + 4% LIBOR + 7%

Russian TP rules established in Section V.1 (Articles 105.1– tions, and it is expected that the Russian tax authorities may 105.25) of the Russian Tax Code are generally in line with the apply certain OECD approaches in practice. OECD Guidelines, with certain notable differences, and pro- vide for a hierarchical approach to the application of the TP methods. The Comparable Uncontrolled Price (‘‘CUP’’) is 3. Besides the determination of whether a viewed as the preferred method, and the Profit Split as the transaction’s interest rate is at arm’s method of last resort. Also, the use of a combination of meth- length, what other factors does your ods is allowed if it provides a better approach to determine country consider in deciding whether the prices for TP purposes. related party financing is arm’s length The Russian Tax Code does not contain any provisions re- garding specific modifications/adjustments to the TP methods and acceptable overall? Examples of with respect to financing transactions; however, it does men- additional factors may include: tion that when considering financing transactions, one should contractual terms, functions of the take into account, inter alia: companies involved, characteristics of the q Credit quality/rating of a borrower; companies’ financial products or services, q Pledge, if any is provided for by the relevant financing agree- ment; economic circumstances, or business q Tenor of the financing transaction; strategies. q Currency in which the debt is nominated; and The Russian Tax Code explicitly states that all of the above fac- q The way the interest rate is set (floating or fixed). tors must be analyzed to determine whether the transactions Generally, the CUP method is considered the most appropri- are comparable, and to perform adjustments to account for dif- ate method for evaluating arm’s length interest rates on related- ferences in the terms of potentially comparable transactions. It party financing transactions, with a preference for internal does not, however, prescribe how those factors should be taken CUPs. When internal CUPs are not sufficiently comparable or into account. do not exist, then external CUPs should be applied. Typically, most contractual terms are treated as comparabil- Russian comparables are applied on a priority basis when es- ity criteria when assessing the arm’s length range of prices for a tablishing an arm’s length range of interest rates for inbound fi- controlled transaction. For financing transactions, contractual nancing transactions, and foreign comparables are preferred terms are likewise expected to significantly affect the arm’s for outbound transactions, if the borrower is located in a for- length range of interest rates. Where the terms are not suffi- eign market. However, in practice, it is often difficult to identify ciently comparable, an adjustment must be made to the price of Russian comparables, and foreign comparables are often used the potentially comparable transactions. The same applies to with relevant comparability adjustments (e.g., adjustments for the characteristics of companies’ financial products or services, currency and country). which would generally be considered important comparability For the TP analysis, it is common to use both Russian data- criteria in performing a transfer pricing analysis since they bases (CLoans, CBonds, and RusBonds), as well as interna- may significantly affect the price. tional databases (Thomson Reuters, LoanConnector, and Bloomberg), depending on the origin of the financing transac- Functional profiles of the counterparties involved in financ- tion and the comparability criteria to be applied. ing transactions should be considered from the TP perspective Generally, there are no special requirements in the Russian and may potentially lead to a change in the TP method applied. TP rules that differentiate the application of a particular TP For example, where an entity provides back-to-back financing, method between inbound and outbound transactions. one should assess whether the entity is a full-fledged risk-taking There is no special methodological guidance issued by the entrepreneur (and thus, it would be reasonable to assess the in- Russian tax authorities with respect to the application of the TP terest rate at which it provides financing to a related party) or methods to financing transactions (or to other types of financial whether it is a limited-risk intermediary providing financing at transactions, such as guarantees); however, they have issued the request of and following instructions of another entity from certain clarifications dealing with specific cases. which it has borrowed (and thus it might be more reasonable The Russian tax authorities are participating in the OECD’s to assess the level of margin/commission it retains as an inter- discussion on the transfer pricing aspects of financial transac- mediary or its level of profitability as of an intermediary).

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 65 Economic circumstances surrounding a financing transac- guaranteed by these persons. If the volume of such debt ex- tion should be considered, as well. For example, the country ceeds the borrower’s own capital by more than three times where the borrower is located may significantly affect the level (12.5 times for banks and leasing entities), the interest expense of credit risk assumed by the lender; hence, this should be fac- accrued on the excess amount would be treated as dividends tored into the analysis of the arm’s length range of interest rather than interest, with all the corresponding tax conse- rates. Another example is the stage of the economic cycle in quences for both the payer and the recipient of the relevant which the controlled transaction is concluded. In periods of un- payment. usually high volatility of market interest rates or foreign cur- Another way the Russian tax authorities may attempt to re- rency exchange rates, one might have to impose more strict qualify debt into the provision of capital is the relatively recent requirements for comparability in terms of the date when po- concept of ‘‘unjustified tax benefit’’ and the general anti-abuse tentially comparable transactions were concluded. Factors rules provided by Article 54.1 of the Russian Tax Code. In gen- such as the industry in which the borrower operates and the eral, these rules state that a taxpayer is entitled to reduce its tax borrower’s financial performance also affect how the pricing of base as a result of concluding a transaction if the main purpose a financing transaction should be assessed. Another important of that transaction was not the reduction of tax. The tax au- example of economic circumstances that may need to be con- thorities are known to broadly interpret these provisions, and sidered is the group synergies an entity enjoys that would affect there have been significant court practice developments (both the level of pricing. successful and unsuccessful) since the introduction of the un- Business strategies of the counterparties may also affect the justified tax benefit concept, where the tax authorities have functional profiles, as described above, or the way the TP meth- challenged the deduction of interest expenses based on this ods are applied, e.g., when an entity tries to achieve a certain concept in a variety of situations. level of profitability on a package of services and products it These court cases include situations where the tax authori- offers (providing one service at a discount and compensating ties stated that loan financing was actually a disguised equity fi- that with increased pricing on another product). One instance nancing, having all attributes of the latter, and the contractual of such an arrangement includes a situation where an entity op- form was chosen purely to achieve additional tax benefits. erating in the financial services sector provides financing to a Hence, their position was that any interest payments made client at a lower rate and compensates for it with commissions were to be treated as dividend payments, with all the corre- for performing various transactions at the request of the same sponding tax consequences for both the payer and the recipi- client. In such a scenario, a taxpayer should consider whether ent. it will be able to demonstrate that the package of services needs The tax authorities and courts examine the following factors to be analyzed as a whole, rather than as a number of separate when assessing the economic substance of a related party loan services. transaction: In determining the pricing of financing transactions, the Rus- q Is there an actual loan agreement supporting the sian tax authorities may apply certain additional criteria that transaction? are, strictly speaking, not related to the TP provisions as pro- q vided in the Russian Tax Code. Namely, the general deductibil- Does the loan agreement contain provisions regarding the ity requirements state that expenses should be properly tenor of the transaction? documented and economically justified, and the tax authorities q Does the loan agreement contain provisions regarding the may challenge the economic justification of certain interest ex- interest rate? Is this interest rate arm’s length? penses. For example, in cases where an entity attracts financing q Do all parties involved in the loan transaction follow its es- and then on-lends to another party, and the interest rate at sential conditions without any violations? which the entity has attracted financing is higher than the rate at which the funds are on-lent, the tax authorities may chal- q Does the borrower have the intent to fulfil its debt lenge the whole arrangement as economically unjustified and obligations? deny the deduction of the excess interest expenses over interest q Does the lender have the intent to request the repayment of income since independent parties would not enter into such an the loan? arrangement without a substantial business reason. This may If interest payments are requalified as dividends due to any of hold true even if the rate at which the entity in question has re- the above reasons, the relevant interest expense would be non- ceived financing and the rate at which it has provided it would deductible for the Russian borrower. otherwise be at arm’s length, if the rates had been considered individually, outside the broader context of the arrangement. Dividend income would be taxed at a different tax rate in the Thus, there are more than just the TP considerations explicitly hands of the lender, compared to interest income. Where the provided by the Tax Code to keep in mind when setting prices lender is a foreign entity, the Russian borrower must also per- on related party financing transactions. form a tax agent’s functions and withhold tax from the interest or dividend payment, with potential penalties levied for non- performance of that function. Where the recipient is a resident 4. If it is determined that any part of a of a jurisdiction having a Double Tax Treaty (‘‘DTT’’) with related party transaction should not be Russia, the requalification of interest into dividends may lead characterized as debt, what are the to an increase in the withholding tax rate. consequences to both the borrower and In addition, disclosure of the financing structure in the TP the related lender? documentation may highlight any issues with respect to the re- cipient not being a beneficial owner of the payment, which may Article 269 of the Russian Tax Code contains thin capitalization cause any DTT relief applied with respect to such payment un- rules restricting the deductibility of interest on loans provided available. to a Russian borrower by a foreign-related entity directly or in- Additional income tax and VAT implications may arise if it is directly participating in the capital of such Russian borrower argued that the financing transaction also includes the provi- or by Russian related parties of such foreign entity, or loans sion of services.

66 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 5. Are there any relevant court cases or tax It is expected that the court practice will continue to develop rulings in your country dealing with the and that the Russian tax authorities will apply an increasingly technically-informed approach to challenge situations in which transfer pricing of intercompany financing they consider that related party transactions are not concluded transactions? at arm’s length. The concept of tax rulings is not developed in the Russian tax Court practice with respect to intercompany financing transac- legislation; however, there are a number of clarifications issued tions continues to develop. Cases dealing with such transac- by the Russian tax authorities dealing with TP issues, including tions from a TP perspective generally analyze whether: financing transactions. These clarifications are generally not q The transaction in question is subject to TP control; binding on the tax authorities and do not have the legal force of q The TP method applied was appropriate; the Russian Tax Code provisions, so there is no certainty that q Information sources chosen were suitable; and the local tax authorities will follow them during tax audits. q Transactions used as comparables were indeed comparable, etc. Evgenia Veter is a Partner and Head of Transfer Pricing and Operating Model Effectiveness in the CIS at EY Moscow; Stepan Kalyuzhnyy is a There are also cases based on a not purely TP perspective that Senior Manager in the Financial Services Transfer Pricing group at EY consider the arm’s length terms of a transaction, namely, ana- Moscow; and Yuriy Mikhailov is a Senior Manager in the Financial lyzing whether: Services Transfer Pricing group at EY Moscow. q The transaction has the attributes of a typical financing They may be reached at: [email protected] transaction; [email protected] q It would have been entered into by unrelated parties on the [email protected] terms existing in a disputed transaction, etc. www.ey.com/RU/en

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 67 United Kingdom Murray Clayson, Cora Hardy and Andrew Cousins Freshfields Bruckhaus Deringer LLP and Duff & Phelps

1. How does your country identify for other transactions10: at the time of the provision, and adjust related party financing one of the entities must directly or indirectly partici- pate in the management, control or capital of the transactions? What is your country’s other, or the same person or persons must directly or approach to determining whether indirectly participate in the management, control or the debt arising from a related party capital of both entities11. This must be true at any financing transaction should be time within six months of entry into the provision12. properly characterized as debt? Control for the purpose of the PC test is broadly de- fined in line with section 1124 of the Corporation Tax Related party financing transactions are identified Act 201013 (CTA 2010) such that it includes not only and adjusted in the UK in line with the rules of Part 4 majority shareholder control, but also extends to the of the Taxation (International and Other Provisions) ability to influence and direct the affairs of another Act 2010 (TIOPA) whose provisions apply to both entity. TIOPA also includes specific rules relating to UK-UK and cross-border transactions. The rules in control, including a joint venture (JV) provision Part 4 of TIOPA (the transfer pricing rules) incorpo- whereby a 40% participant in a JV will be deemed to rate a provision stating that they are to be interpreted control the JV where another participant also owns at so as best to secure consistency with the latest version least 40% of the JV14. of the OECD Transfer Pricing Guidelines for Multina- For indirect participation, the PC test is met where tional Enterprises and Tax Administrations (the the provision relates to financing arrangements for a OECD Guidelines)1 such that the OECD Guidelines company and others have ‘acted together’ in relation are automatically incorporated into UK national law. to the financing arrangements15. HMRC Guidance The historical framework for TIOPA’s transfer pric- says ‘acting together’ has a wide meaning and does not ing rules is broadly that the provisions were previ- require an equity interest in the company benefiting ously contained in Schedule 28AA Income and from the financing arrangements16. The PC test would Corporation Taxes Act 1988 (ICTA). This schedule then be met for each entity or person that has ‘acted contained both the transfer pricing rules, previously together’ where they have collectively met the condi- addressed via much simpler legislation in ss770-773 tion. ICTA, and the thin capitalization rules, previously Identification of related party financing transac- found within the distribution rules in s.209(2)(da) tions ICTA. Related party financing transactions are identified The transfer pricing rules explicitly apply to financ- by applying the criteria to meet the aforementioned 2 3 ing arrangements , including ‘securities,’ which in- basic pre-condition. Where it is met and the provision clude loans or advances, and guarantees between that has actually been made between the two entities 4 corporate parties although certain exemptions exist confers a potential UK tax advantage on one of the 5 for small and medium enterprises (SMEs) and dor- two entities17 then the profits and losses of the entity 6 mant companies . with the potential advantage are to be calculated as The basic test for the application of the transfer though the arm’s length provision was the actual pro- pricing rules is threefold: vision agreed between the two entities18. 1. there must be a provision entered into between Within transfer pricing, UK legislation also pro- any two entities; vides specific thin capitalization provisions to identify 2. those two entities must satisfy the ‘participation scenarios where a related party issues a security19,or condition’7; and gives a guarantee20, which results in the borrower ob- 3. the provision that is entered into must differ from taining debt that would or could not otherwise have the provision that would have been entered into had been got on the open market21. The applicable consid- the two entities been independent (known as the erations to determine whether the borrowing falls ‘arm’s length provision’)8. within these provisions are whether, had there been Collectively, this tripartite test is referred to as ‘the no special relationship, the loan or guarantee would basic pre-condition’9. have been made; what amount it would have been for For financing transactions, the criteria to meet the or covered and what terms, including interest rate for participation condition (the PC test) are broader than loans or consideration for guarantees, would have

68 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 been agreed22. Also to be considered, ignoring the effect of any terised as something of a different nature. If the actual provision guarantee from which the company may benefit 23, are the ap- is a loan, recharacterisation as equity should not be an immedi- propriate level of indebtedness for the borrowing company, ate response37’’. whether the transaction would have been entered into and the Nonetheless, as HMRC states above, the UK’s approach to terms, including interest rate, that might have been expected24. characterization of transactions is informed by the OECD This has been explained in guidance as the ‘could/would test’25. Guidelines and these have now moved towards a concept of so- Hence HMRC will consider both what a borrower could have called ‘accurate delineation’ as a form of characterizing a trans- borrowed in the market and what a borrower, acting in its best action and determining whether it needs to be replaced by an interests, would have borrowed. The idea is that this identifies alternative. For instance, the OECD’s final report for BEPS ac- scenarios in which the borrower has obtained more debt than tions 8-10,38 in discussing MNEs (multinational enterprises), it otherwise could have or in which the borrower had no com- states that ‘‘every effort should be made to determine the actual mercial reason to take on the debt. nature of the transaction and apply arm’s length pricing to the ac- Characterization as debt curately delineated transaction, and to ensure that non- recognition is not used simply because determining an arm’s Debt is not defined in statute but case law has held it to be ‘‘a length price is difficult. [However] the transaction as accurately sum of money which is now payable, or will become payable in delineated may be disregarded, and if appropriate, replaced by an the future, by reason of a present obligation,debitum in presenti, alternative transaction, where the arrangements made in relation solvendum in futuro26’’. Whether the future amount to be paid to the transaction, viewed in their totality, differ from those which is ascertainable affects whether the sum is legally considered a would have been adopted by independent enterprises behaving in debt in the UK. For instance, in Marren (Inspector of Taxes) v a commercially rational manner in comparable circum- Ingles27, which concerned the sale of shares in a company for a stances’’39. Hence, re-characterization, though a last resort, is fixed sum plus an additional sum based on the market price of permitted. While the Discussion Draft notes that the OECD the shares on the first day of dealing following flotation. Lord does not intend to suggest that accurate delineation is the only Wilberforce said that ‘‘no meaning however untechnical of that approach by which a country may characterize debt40’’,itis word [debt] could, to my satisfaction, include such a right [i.e. a clear HMRC Guidance, as discussed at question 3 below, does contingent right to receive an unascertainable sum]’’. Since the follow the OECD approach, referring to a comparability analy- additional sum was not a debt, its receipt could not be exempt sis41 whose first step is accurate delineation42. from the charge to tax. The exceptional circumstances in which the OECD Guide- The loan relationships code governs the treatment of debt. It lines suggest re-characterization arise where the commercial applies to UK corporation tax-subject companies28 where the rationality of the arrangement is questionable43. One of the two company is in a loan relationship: i.e. stands in position of examples given is where a company owning property in an area creditor or debtor as respects any ‘money debt’ and the debt prone to flooding and which cannot obtain insurance due to the arises from ‘a transaction for the lending of money’29. Subject risk of claims, receives insurance from an associated com- to certain exceptions, a money debt is a debt to be settled by pany44. Given that there is no market for the insurance, this is payment of money, issue or transfer of shares in a company, or said to be a commercially irrational transaction. Since there transfer of a right to another money debt30. HMRC Guidance would be no price which is acceptable to both parties at arm’s gives examples of money debts which do not arise from lending length, the transaction would not be recognized for tax pur- (and so which do not fall within the loan relationships code) in- poses (the first company’s profits are thus not reduced by pay- cluding guarantees for loans31. In addition to ‘traditional’ lend- ment of its insurance premium to the second and the second ing relationships, the code also covers, at Part 6, what it calls company is not treated as having issued any insurance or as ‘relevant non-lending relationships’32 and other financial ar- liable for any claim). In the UK, Abbey National Treasury Ser- rangements which, for accounting purposes, are equivalent to vices Plc v HMRC45 (Abbey National), discussed in more detail debt finance but which don’t satisfy the legal definition such as at question 5, dealt similarly with an issue of tracker shares. At shares with guaranteed returns33. the heart of the transaction was the issue of shares for £1,000 Interest on debt can sometimes be deducted in computing while their market value was £161 million. As the First-tier Tri- profits. The UK transfer pricing regime operates to ensure that bunal put it: ‘‘it is very difficult to imagine a comparable commer- such deductions for interest payments only arise where the cial situation in which a company would be willing to give away payments are on an arm’s length basis. For example, in respect 160 million of value in exchange for 1,000 to a third party. To use of companies that are thinly capitalized, the UK allows tax de- the terms of the OECD Guidelines, it does not represent commer- ductions for the amount of debt that could be obtained on the cially rational behaviour46’’. The tribunal noted that the OECD open market and the balance, the ‘excessive debt,’ is treated as Guidelines restrict the disregarding or substituting of another though it were provided in some other way, for example, as transaction for the actual transaction except in exceptional cir- 34 equity . An agreed debt:equity ratio may form part of an ‘Ad- cumstances but concluded that this was a transaction which 35 vance Thin Capitalization Agreement’ . Strictly speaking, fell within the exceptional category47. however, the treating of debt as equity is not a re- With regard to non-UK companies with a permanent estab- characterization since the interest remains interest for tax pur- lishment (PE) in the UK, the loan relationships code and trans- poses; it is simply ‘disallowed’ in the calculation of deductions. fer pricing rules apply in a broadly similar manner in that the In exceptional circumstances, HMRC may consider transac- PE is liable for UK corporation tax on its UK profits48, able to tion re-characterization but HMRC Guidance states that the make deductions in respect of those profits49 and must operate starting point is that, if the funding has been provided in the with associated companies on an arm’s length basis50. Where form of, say, a loan, the form and substance of the provision are the PE is a bank, intra-entity dealings in the nature of loans be- assumed to be the same36. HMRC states that it is: ‘‘committed tween the PE and the head office of the non-UK company are by statute to follow the OECD guidance on transfer pricing, and not recognized unless they would have been carried out be- where necessary to adjust the actual provision to the arm’s length tween independent enterprises and could reasonably have been provision. [However] it is only if this adjustment cannot be carried out for commercial reasons51. HMRC Guidance achieved by gradual adjustment that the transaction is recharac- states52 that it will usually not accept such loans because it will

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 69 generally not make commercial sense for such cross-border calculation takes account of securities issued both at a dis- transfers to take place between independent banks. The specific count66 and at a premium67. scenarios in which a transfer may be effective for tax purposes Interest will fall under Category F if it is paid in respect of a include where the PE is closed such that any unsold loans need security68 issued otherwise than for new consideration, which to be transferred or where the transferred loan forms part of is convertible, results-linked, connected to shares or a long- the trading stock of the non-UK company. For the latter to term ‘equity note’. Hence, debt, which in some aspect has apply, the non-UK company must be involved in active trading equity-like features, will be treated as having generated distri- which does not consist solely or principally of the acquiring butions. There are exceptions to this, including where the re- and disposing of related-party loans and the transaction must cipient company is within the charge to UK corporation tax69 be within normal trading parameters and conducted in the so long as the interest payments do not exceed a reasonable normal course of trading activity53. Irish Bank Resolution Cor- commercial return70. Hence, Category F generally applies poration Limited v HMRC54 considered whether the attribution where the lender is not a company or is a company but is not of notional capital to a bank was incompatible with the terms resident in, nor has its permanent establishment in, the UK or of the UK-Ireland double tax treaty and the tribunal concluded, the lender is a UK company. in HMRC’s favour, that it was not. The aim of the adjustment is Adjustment of related party financing transactions to eliminate distortion and the tribunal did ‘‘not understand Where related party financing transactions are identified as how the distortion can be eliminated if the PE [. . .] is neverthe- not at arm’s length, the transaction should be reported as an ad- less to be shielded from the adjustments or attribution which it is justment through the UK self-assessment system. necessary to make if those requirements [the arm’s length require- HMRC may open an enquiry which relates to any aspect of 55 ments] are to be met ’’. the return submitted. With respect to arm’s length adjustments, Effect of group synergies on characterization features which may trigger such an enquiry include the incor- Where companies are part of an MNE group, they may ben- poration of group entities in ‘tax havens’ or the presence of out- efit from advantages that would not otherwise be available such lying low profits in the UK in comparison to a company group as economies of scale or increased purchasing power56 but this as a whole. If an enquiry is opened, HMRC have the power to does not necessarily mean re-characterization applies. If ben- request such information from the company as is reasonably 71 efit arises solely by virtue of group membership, the transfer required for the purpose of the enquiry and may ultimately pricing regime will not interfere. However, if concerted group amend the tax return to reflect any adjustment they consider 72 action generates valuable synergies, the transfer pricing regime necessary , including to reflect an arm’s length transaction. It may operate to reallocate the benefit or burden. By way of ex- is possible to appeal an amended return before the UK tax tri- ample, the OECD Guidelines explain that, where an MNE bunal. group company wants to obtain a loan, some improvement in In addition to the adjustment of tax returns, HMRC have the its credit rating may arise naturally by virtue of its MNE group power to impose penalties and interest (calculated from the day membership such that a bank is prepared to offer better terms, on which underpaid tax was originally due) for returns that are including a better interest rate than that company could have incorrect. However, penalties for inaccuracy may only be obtained were it not part of the MNE group57. However, where charged if, first, there is an understatement of liability to tax, a there is a guarantee provided by another group member which false/inflated statement of loss or a false/inflated claim to repay- would similarly have the effect of improving the credit rating of ment and, second, the statement so made is careless or deliber- the borrower company and hence the terms on which it can ate73. The statement will be considered careless if made borrow, this benefit does not arise naturally from group mem- without reasonable care74. bership but rather is the result of a deliberate concerted action Given these powers, it is advisable for companies to commis- – the guarantee58. The additional benefit should therefore be sion proportionate advice on any arrangements that may fall compensated for via payment of a proportionate fee, echoing within the transfer pricing regime such that they can justify the the Tax Court of Canada’s decision in GE Capital Canada Inc. v return positions taken to HMRC. Indeed, acting on the advice The Queen59. of a competent adviser (which proves to be incorrect despite Distribution Rules the adviser being given a full set of accurate facts) is listed, among other scenarios, in HMRC Guidance75 as a case in A form of statutory ‘re-characterization’ occurs under the dis- which a penalty would not be levied. In addition, HMRC Guid- tribution rules in the CTA 2010 such that interest is re- ance76 recommends that companies keep detailed accounting characterized as a distribution and not deductible in the records covering, inter alia, any dealings with associated busi- computation of profits chargeable to corporation tax. Pay- nesses and any tax adjustments made, such that they can dem- ments made out of the assets of a company60 and labelled as in- onstrate their computation of related party transactions is in terest are classed as distributions for tax purposes where they line with the transfer pricing rules. are made in respect of non-commercial securities61 (Category E) or special securities62 (Category F). Interest is considered paid in respect of a security if it is paid to the holder at the ap- 2. What rules or guidance exist in your propriate time and pursuant to a right granted in respect of a country to determine the arm’s length security63. interest rate for a related party financing Broadly, interest will fall under Category E if the amount transaction? paid in consideration for the secured principal exceeds a rea- sonable commercial return for the same64. There is some over- Factors lap between the concept of a ‘reasonable commercial return’ Where an interest rate is to be imputed on a loan, HMRC and the arm’s length concept within the transfer pricing rules. Guidance states that the key factors in the determination of the Calculation of the secured principal is based on the minimum appropriate level will be the currency of the loan, its amount amount the lender is entitled to be repaid on redemption of the and duration and the scale, degree and nature of the risks in- security65 which, in practice, means the secured principal may volved77. The Discussion Draft says the interest rate of a loan be calculated to be lower than the sum originally advanced. The can be tested against public data for borrowers with equivalent

70 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 credit ratings and terms and conditions78. It may be possible to Guidelines has been abandoned, the 2017 OECD Guidelines compare alternative transactions with similar economic char- (TPG 2017) still state a preference for traditional transaction acteristics (an example given is the comparison of an intra- methods94 where traditional and transactional profit methods group loan with a bond issuance79), or internal comparables can be applied in an equally reliable manner, as well as for CUP (e.g. comparable loans within the borrower’s group with an in- over other traditional transaction methods, while they ac- dependent counterparty)80. knowledge the importance of using the most appropriate HMRC often rely on independent studies to determine arm’s method in each case95. length commercial terms. For example, HMRC Gudiance81 The CUP method broadly involves the identification of a suggests that the Department of Land Management at De comparable independent transaction and a direct comparison Montfort University’s annual report ‘The UK Commercial Prop- of the pricing of such a transaction with the one being consid- erty Lending Market,’ for example, is a useful indicator of what ered in a transfer pricing context96. Where it is not possible to an independent party might have lent with property as security. identify a precise comparable transaction, it may be appropri- HMRC Guidance notes, however, that care should be taken ate to use a median or weighted average figure as the appropri- when referring to such independent studies since ‘‘it does not ate adjustment97. The OECD Guidelines explain that, whilst it give the answer in any particular case [. . .] each [case] must be will sometimes be possible to identify a single figure that will considered on its own merits, according to the relevant facts.’’ make a transaction arm’s length, it is usually the case that the Where debt is guaranteed by a connected company, the guar- arm’s length rate or price will fall within a range of figures. The antee’s effect is disregarded to calculate the arm’s length inter- OECD Guidelines note that ‘‘taxpayers may seek to evidence the est rate82 so as to determine the terms the borrower might arm’s length rate of interest on an intra-group loan by producing otherwise have obtained on an arm’s length basis and the ap- written opinions from independent banks[. . .] stating what inter- propriate fee for the value imparted by the guarantee. Broadly, est rate the bank would apply were it to make a comparable loan if the borrower could not have obtained all or part of its loan to that particular enterprise98’’. This approach is said not to without the guarantee, any interest in respect of the part the work, however, as it moves away from the proper basis of as- borrower could/would not have obtained will be non- sessment, i.e. comparability to actual transactions99. deductible and a non-deductible fee, proportionate to the ben- efit obtained, would be expected83. 3. Besides the determination of whether a Where the amount to be deducted in respect of interest or transaction’s interest rate is at arm’s other amounts payable under the security is reduced, for trans- fer pricing purposes84, a compensatory adjustment may be length, what other factors does your available for a domestic guarantor85 to the extent of the disal- country consider in deciding whether the lowance. This is available only if the guarantor meets the arm’s related party financing is arm’s length length test (i.e. it both would and could borrow the revised and acceptable overall? Examples of amount at arm’s length). In such circumstances, the guarantor additional factors may include: is treated as though it had issued the security, owed the liabili- contractual terms, functions of the ties under it and had paid any interest in respect of the same86. With regard to non-UK companies with a PE in the UK, the companies involved, characteristics of the transfer pricing of dealings between the PE and non-UK com- companies’ financial products or services, pany must likewise be on arm’s length terms87. The authorised economic circumstances, or business OECD approach, set out in the 2010 OECD Report on the Attri- strategies. bution of Profits to Permanent Establishments88 is that the prof- its attributable to the PE are those the PE would have earned at Transfer pricing considers whether the transaction as a whole arm’s length ‘‘if it were a separate and independent enterprise en- differs from that which would/could have been entered into if gaged in the same or similar activities under the same or similar the two entities were independent100. The issue is therefore conditions, taking into account the functions performed, assets clearly far broader than a consideration of interest rate. used and risks assumed by the enterprise through the permanent HMRC Guidance refers to what it calls the ‘comparability establishment89’’. To determine the arm’s length nature of the analysis’101 necessary to determine if a transaction meets the transaction, a two-step analysis is recommended by the OECD: arm’s length principle. This comprises two parts: accurate de- first, a functional and factual analysis as to the PE’s role within lineation of the controlled transaction and comparison of the the group as a whole and, secondly, the application of transfer price and conditions of the controlled transaction with those of pricing principles to the remuneration for any dealings be- a comparable transaction between independent enterprises tween the two companies by reference to the function per- (the same test is also set out in TPG 2017 at para. 1.33). formed, assets used and risk(s) assumed. As a result of this Accurate delineation analysis, it may be appropriate to attribute notional capital to In order accurately to delineate the transaction, HMRC the PE. There are specific rules for PEs that are banks or insur- Guidance suggests consideration of its ‘economically relevant ance companies. For example, for insurance companies, the characteristics’ which comprise its conditions and the eco- analysis of which part of the business assumes the insurance nomically relevant circumstances in which the transaction risk for the enterprise90 is key and investment assets must be at- took place102. The economically relevant characteristics (or tributed accordingly91. comparability factors) will include, inter alia, the contractual Methodologies terms of the transaction, the parties’ business strategies, the HMRC Guidance92, basing itself on the OECD Guidelines93, economic circumstances of both the parties and the market in identifies five different transfer pricing methodologies. These which they operate and the functions performed by each of the are: comparable uncontrolled price (CUP); resale minus; cost parties, including the assets used and risks assumed and how plus (these three together, traditional transaction methods); these relate, inter alia, to group strategy and industry prac- profit split and the transactional net margin method (the latter tice103. HMRC Guidance characterizes risk assumption (or two together, transactional profit methods). HMRC Guidance control) as a particular consideration104 and the OECD Guide- notes that, although the strict hierarchy in the 1995 OECD lines suggest an analysis of risk should include specific identifi-

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 71 cation of the economically significant risks, determination of vantaged party to apply for a compensatory adjustment. Where how the parties’ contract operates to allocate that risk and iden- both parties are UK companies, this can be done under section tification of the parties functions in respect of risk, e.g. the es- 174 TIOPA. The criteria for so doing are that only one of the tablishment of which performs the control or risk mitigation parties to the provision is advantaged by the same, the other af- function105. The Discussion Draft states that, if a lender does fected party is within the charge to income or corporation tax not perform the functions relevant to the management of risk, in respect of the relevant profits and the advantaged party has it may only be entitled to a risk-free return, i.e. the risk on an made a return or been given a relevant notice on the basis of the investment where there is no risk of loss106. It also adds specific arm’s length value of the provision112. The disadvantaged party detail on the identification of the economically relevant charac- has two years to make a claim from the date the advantaged teristics of an advance of funds, including, transaction- party makes their return or was issued with the relevant dependent, the presence or absence of a fixed repayment date, notice113. Where one of the parties is a UK company and the obligation to pay interest and right to enforce payment may107. other is foreign, a somewhat similar compensatory adjustment The Discussion Draft notes that the accuracy of any determina- may be available under the applicable tax treaty. Many of the tion based on comparables will be improved if the independent UK’s treaties are modelled on the OECD model tax convention borrower has a similar business strategy to the ‘tested which, at Article 9(2), provides for appropriate adjustments. borrower108’. Comparison with independent transaction In respect of the second limb of the comparability analysis, 5. Are there any relevant court cases or tax the OECD Guidelines set out nine steps to be undertaken when rulings in your country dealing with the comparing the price and conditions of the controlled transac- transfer pricing of intercompany financing tion109. These steps broadly require the setting of parameters transactions? for the comparison (and so include such factors as the determi- nation of the years to be covered in the analysis and the tax- Broad application payer’s circumstances, identifying the significant comparability Case law makes clear that the UK transfer pricing rules have factors to be taken into account and choosing the most appro- always been considered to have a broad application. For in- priate calculation method). HMRC Guidance notes that the stance, Ametalco UK v Inland Revenue Commissioners114, best source of comparison may be other transactions which in- which considered the extent to which the old regime applied to volve the parties themselves110 where they have entered into interest-free loans, found that the phrase ‘business facilities of other transactions with third parties. It includes practical guid- any kind as they have effect in relation to sales’115 did include ance for case teams such as help for a business with a large such loans and HMRC Guidance which discusses this case sug- number of potential comparables to narrow down the scope of gests that, in practice, transfer pricing was a broader concept its analysis and suggests that, where transactions are found not still, which applied not only to interest-free loans but more gen- to be similar, the reasons why the transactions were not similar erally to financial facilities of which loans are given as an ex- enough should also be analysed111. ample116. 4. If it is determined that any part of a A more recent case, Abbey National, concluded that transfer related party transaction should not be pricing could also apply to shares. The shares in question were issued to Abbey by its subsidiary ANTS and linked to money characterized as debt, what are the swap receipts such that Abbey was entitled to a non-cumulative consequences to both the borrower and dividend in respect of the cash flow from various of ANTS’ the related lender? swaps. With respect to transfer pricing, it was held that the share issue was a provision for the purposes of Schedule Where a transaction involves debt, the corresponding interest 28AA117 and that, given, as discussed above, the wide gap be- on that debt will generally constitute a permitted debit for the tween the true value of the shares and the consideration paid, borrower (and credit for the lender) from a UK tax perspective, this was not a transaction which would have taken place be- subject to a range of restrictions. These include the corporate tween independent parties. Thus the debit which arose was re- interest restriction introduced to implement BEPS Action 4 duced to nil via the transfer pricing rules118. On the other hand, and set out in Part 10 TIOPA 2010 which, at its simplest, aims Union Castle Mail Steampship Company Ltd v HMRC119(Union to limit deductions above a £2 million de minimis to the lower Castle), a case on similar facts, reached the opposite conclu- of 30% of the UK tax EBITDA and a measure of the worldwide sion regarding the application of the transfer pricing regime to group’s net external expense. equity. The tribunal noted that equity transactions were not If, instead, some or all of the debt is not characterized as specifically included in the transfer pricing rules and that the such, the transfer pricing rules will operate to adjust the trans- OECD model treaty commentary on Article 9120 made a distinc- action to reflect the arm’s length price. If it were found, in the tion between debt and equity finance. It was thus concluded case of a loan, that the interest were excessive, this would mean that equity transactions did not amount to provisions and the that, from a borrower perspective, any deductions made for in- transfer pricing regime would not apply. Union Castle was terest payments above those that would and could have been listed for appeal before the Upper Tribunal from 25-28 June made on an arm’s length basis will be disallowed. Similarly, if 2018 and it remains to be seen whether this decision is upheld. the interest is found to be too low, such that the lender receives Computation factors and methodology less income than it would or could on an arm’s length basis, ad- ditional income will be imputed to the lender. The leading UK transfer pricing case is DSG Retail Ltd and If this occurred without further adjustments, the result could others v HMRC121 (DSG). This concerned the reinsurance of be the taxation of the same income in the hands of both parties DSG Retail’s warranties, via third-parties, to DISL, a captive in- (for example, if the lender’s income were revised upwards but surance company, which formed part of the DSG group and the borrower’s deduction were unaffected). To avoid this effec- was incorporated in the Isle of Man. There were two third par- tive economic double taxation, it may be possible for the disad- ties successively involved in the process: Cornhill (who rein-

72 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 sured 95% of the risk on its warranties with DISL) and ASL 19 S. 152 TIPOA. (who insured 100% of its risk on its service contracts with 20 S. 153 TIOPA. DISL). 21 INTM413010. 22 HMRC argued that, although there was no transaction di- S. 152(2) TIOPA and S.153(2) TIOPA. 23 rectly between members of the same group, the presence of S. 152(5) TIOPA and S.153(5) TIOPA. 24 third parties Cornhill and ASL in the arrangement between S. 152(6) TIOPA and S.153(6) TIOPA. 25 DSG Retail and DISL did not prevent there having been a ‘pro- INTM413030. 26 vision’ (for the purposes of what was then Schedule 28AA ICTA Webb v Stenton (1883) 11 Q.B.D. 518, per Lindley L.J. 27 [1980] 1 W.L.R. 983. 1988) or a ‘business facility’ (in respect of those years of the ar- 28 S. 292(1) and 295(1) CTA 2009 (see also ss.5(1, 5(3) and 19 CTA rangement in which s. 770 ICTA was relevant) between DSG 2009 for companies included). Retail and DISL. It was found that the market was competitive 29 S. 302 CTA 2009. and other insurers could have taken on the risk for less, that 30 S. 303(1) CTA 2009. DISL had in fact born relatively little risk and that DISL had 31 CFM30140. little bargaining power in comparison with DSG Retail. This ar- 32 Ss. 478-486 CTA 2009. rangement had resulted in a tax advantage for DSG Retail in 33 S. 302(4) and Part 6 CTA 2009. that its profits did not reflect the income it would have received 34 INTM413020. for its provision/business facility had it been dealing with DISL 35 Part 5 of TIOPA governs ATCAs. on an arm’s length basis. Thus the majority of the profit was to 36 INTM502020. be imputed to the UK for tax purposes. The actual adjustment 37 INTM502020. was not calculated but guidelines were given on the approach 38 Aligning Transfer Pricing Outcomes with Value Creation, Actions to be adopted. Notably, the CUP analysis proposed by DSG 8-10 - 2015 Final Reports. Retail was rejected, on the basis that no suitable comparable 39 Para. 1.122, Aligning Transfer Pricing Outcomes with Value Cre- could be found, and what amounted to a form of profit split ation, Actions 8-10 - 2015 Final Reports. analysis (such that commission was effectively imputed back to 40 Para. 9, Discussion Draft. the UK) was used instead. 41 INTM485021. The Discussion Draft includes commentary on captive insur- 42 INTM485022. 43 ance122 as well as captive reinsurance or fronting as occurred Para 1.123, Aligning Transfer Pricing Outcomes with Value Cre- in DSG. Like DSG, the Discussion Draft notes that fronting ar- ation, Actions 8-10 - 2015 Final Reports. 44 rangements are particularly difficult to price123 but that the key Para. 1.126, Aligning Transfer Pricing Outcomes with Value Cre- issue is whether the transactions are genuine insurance/ ation, Actions 8-10 - 2015 Final Reports. 45 reinsurance transactions and whether the premiums payable to [2015] UKFTT 341 (TC). 46 [2015] UKFTT 341 (TC) at para. 104. the reinsurance captive are on arm’s length terms124. In terms 47 [2015] UKFTT 341 (TC) at para. 105. of calculating the arm’s length price, however, it is notable that 48 S. 5(3) CTA 2009; see also s.21 CTA 2009. the Discussion Draft proposes either actuarial analysis or CUP, 49 S.29(5) CTA 2009. the latter of which DSG suggests may not always be easy to 50 S. 22 CTA 2009. apply in reinsurance circumstances125. 51 S. 26 CTA 2009. 52 INTM267623. Murray Clayson is a Partner in the London tax practice of Freshfields 53 Bruckhaus Deringer LLP; Cora Hardy is a Trainee Solicitor at Freshfields Para. 15 of the OECD Commentary on Article 7 of the Model Tax Bruckhaus Deringer LLP and Andrew Cousins is a Director in Duff & Convention. 54 Phelps’ London office. [2017] UKFTT 702. They may be contacted at the following email addresses: 55 [2017] UKFTT 702 at para 63. murray.clayson@freshfields.com 56 Para. 1.157, D-8, Ch. 1, TPG 2017. cora.hardy@freshfields.com 57 Para.1.166, D-8, , Ch. 1, TPG 2017. https://www.freshfields.us 58 Para. 1.167, D-8, , Ch. 1, TPG 2017. [email protected] 59 2009 TCC 563. http://www.duffandphelps.com 60 S. 1117(1) CTA 2010. 61 S. 1000(1)E CTA 2010. 62 S. 1000(1)F CTA 2010. NOTES 63 S. 114(5) and (6) CTA 2010. 1 S. 164(1) and (4) TIOPA. 64 S. 1005 CTA 2010. 2 S. 161 TIOPA. 65 CTM15501. 3 S. 154 TIOPA. 66 S. 1006 CTA 2010. 4 S. 153 TIOPA. 67 S. 1007 CTA 2010. 5 S. 166 TIOPA. 68 S. 1015 CTA 2010. 6 S. 165 TIOPA. 69 S. 1032(1) CTA 2010. 7 S. 148 TIOPA. 70 S. 1032(2) CTA 2010. 8 S. 147(1) TIOPA. 71 Para. 27(1), Schedule 18, Finance Act 1998. 9 S. 147(1) TIOPA. 72 Para. 34(2)(b), Schedule 18, Finance Act 1998. 10 S. 148(1)(a) TIOPA. 73 Para. 1(2) and (3), Schedule 24, Finance Act 2007. 11 S. 148 (2) and (3) TIOPA. 74 Para. 3, Schedule 24, Finance Act 2007. 12 S. 148(2) TIOPA. 75 CH81130. 13 S. 217 TIOPA. 76 INTM483030. 14 S. 160 TIOPA. 77 INTM50140. 15 S. 161 and 162 TIOPA. 78 Para. 84, Aligning Transfer Pricing Outcomes with Value Cre- 16 INTM519040. ation, Actions 8-10 - 2015 Final Reports. 17 S. 147(2) TIOPA. 79 Para. 86, Aligning Transfer Pricing Outcomes with Value Cre- 18 S. 147(3) TIOPA. ation, Actions 8-10 - 2015 Final Reports.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 73 80 Para. 88, Aligning Transfer Pricing Outcomes with Value Cre- 101 INTM485021. ation, Actions 8-10 - 2015 Final Reports. 102 INTM485022 81 INTM518030. 103 Para. 1.36, TPG 2017. 82 S. 153(5) and (6) TIOPA 2010. 104 INTM485023. 83 INTM413130. 105 Para 1.60, TPG 2017. 84 S. 191(1) TIOPA 2010. 106 Para 1, Box B.4, Discussion Draft. 85 S. 192 TIOPA 2010 and INTM413160. 107 Para. 16, Discussion Draft. 86 S. 192(1) TIOPA 2010. 108 Para 36, Discussion Draft. 87 S. 22 CTA 2009. 109 Para 3.4, TPG 2017. 88 See B-1, 2010 OECD Report on the Attribution of Profits to Perma- 110 INTM485070. nent Establishments. 111 INTM485070. 89 Para 8, B-1, 2010 OECD Report on the Attribution of Profits to Per- 112 Ss. 174(1) and s.176 TIOPA 2010. manent Establishments. 113 S. 177(2) TIOPA 2010. 90 Para. 93, C-1, 2010 OECD Report on the Attribution of Profits to 114 [1996] STC (SCD) 399. Permanent Establishments. 115 S. 773(4) ICTA. 91 Para. 99, C-1, 2010 OECD Report on the Attribution of Profits to 116 INTM1528. Permanent Establishments. 117 92 INTM484070. See para. 102, [1996] STC (SCD) 399. 118 93 INTM421005. See para. 106, [1996] STC (SCD) 399. 119 94 Para. 2.3, Part 1, Chapter II TPG 2017. [2016] UKFTT 526 (TC). 120 95 Para. 2.3, Part 1, Chapter II TPG 2017. at para. (3)(b). 121 96 For a more detailed explanation, see INTM484070. [2009] STC (SCD) 397. 97 Paras 3.57-3.62, Part 1, Chapter II TPG 2017. 122 Para. 163, Discussion Draft. 98 Para. 92, Part 1, Chapter II TPG 2017. 123 Para. 178, Discussion Draft. 99 Para. 93, Part 1, Chapter II TPG 2017. 124 Para. 178, Discussion Draft. 100 S. 147(1) TIOPA 2010. 125 Para. 181, Discussion Draft.

74 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 United States Michelle Johnson, Stefanie Perrella, Michael Berbari, and Zachary Held Duff & Phelps, United States

1. How does your country identify At the time this was written, there remained uncer- and adjust related party financing tainty around the fate of the 385 Regulations, as there have been a series of recent governmental actions transactions? What is your country’s taken to temper the regulations. Most recently, on approach to determining whether September 21, 2018 the IRS and Treasury filed a pro- the debt arising from a related party posal to remove the minimum documentation re- financing transaction should be quirements under Section 1.385-2, relieving taxpayers properly characterized as debt? from these requirements which were set to go into effect next year. That said, the IRS and Treasury indi- In the U.S., the pricing of related party indebtedness is cated that they will continue to study the issues ad- covered under the transfer pricing rules found in In- dressed by these rules and left open the possibility of ternal Revenue Code (‘‘IRC’’) Section 482 and its cor- proposing ‘‘substantially simplified and streamlined’’ responding regulations under Treasury Regulations documentation requirements at a later date. It is also Section 1.482 (‘‘U.S. Transfer Pricing Regulations’’). still to be seen if the IRS and Treasury will take any ac- Loans are addressed under a special category of regu- tions to repeal or modify other sections of the regula- lations under Section 1.482-2 entitled ‘‘Determination tions promulgated under IRC Section 385. of Taxable Income in Specific Situations.’’

The Internal Revenue Service (‘‘IRS’’) can request 2. What rules or guidance exist in various sources of information to identify related your country to determine the arm’s party financial transactions. For example, the taxpay- length interest rate for a related er’s transfer pricing documentation can be requested. party financing transaction? Taxpayers in the U.S. are not required to prepare transfer pricing documentation, but many do in order It is important to note that the U.S. Transfer Pricing to avoid potential penalties applicable under Treasury Regulations only apply to bona fide indebtedness be- Regulations Section 1.6662. In addition, a taxpayer’s tween related parties.3 Therefore, no analysis of the income and deductions on the income tax return interest rate can be considered arm’s length unless the could be analyzed for line items associated with fi- intercompany financing arrangement in question rep- nancing transactions (e.g., interest expense). Useful resents bona fide indebtedness. information can be found on U.S. Forms 5471 (‘‘Infor- Unlike other types of related party transactions mation Return of U.S. Persons With Respect to Cer- such as the transfer of tangibles or the provision of in- tain Foreign Corporations’’) or 5472 (the tragroup services, the rules for pricing related party corresponding information return for foreign-based indebtedness are somewhat unique in that they do not corporations), where the nature and magnitude of in- prescribe a specific set of traditional transactional and tercompany transactions (including intercompany in- profit-based methods. Instead, the U.S. Transfer Pric- terest) can be identified. Adjustments to the pricing of ing Regulations prescribe a requirement that loans related party financing transactions are made under between related parties reflect interest rates that IRC Section 482 and the associated regulations. would have been charged between unrelated parties In terms of characterization, the U.S. Treasury and under similar circumstances. In practice there are IRS released final and temporary regulations under three routes that taxpayers can use under the U.S. IRC Section 385 (the ‘‘385 Regulations’’) in October Transfer Pricing Regulations: 2016. These regulations were intended to formalize Funds Obtained At Situs of Borrower: The U.S. standards for determining debt characterization for Transfer Pricing Regulations indicate that where a related party transactions. Section 1.385-1 includes a taxpayer borrows funds from a third party at the situs general rule that effectively implements common law of the borrower, and then on-lends those funds to the factors into the regulations.1 Section 1.385-2 requires related party borrower, the arm’s length interest rate that certain factors be documented for an instrument2 in the related party transaction would be equal to the to be considered debt, and Section 1.385-3 elevates interest rate charged in the third-party transaction certain other factors, which if present, would dis- (after adjusting the related party transaction for any qualify an instrument as debt. administrative costs incurred on behalf of the related

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 75 party lender).4 If the facts support use of this method and it is q Principal amount and duration of the loan: It is important not applied, then taxpayers must otherwise demonstrate a to account for differences in principal amount when evaluat- more appropriate rate under the arm’s length standard, as de- ing potential comparable transactions. Furthermore, it tailed below. should not go unnoticed that the U.S. Transfer Pricing Regu- Safe Haven Interest Rate: Taxpayers may elect to price in- lations specifically use the word ‘‘duration’’ in evaluating an tercompany debt at a rate between 100 and 130 percent of the arm’s length interest rate for a loan. While duration in its sim- appropriate Applicable Federal Rate (‘‘AFR’’) if 1) the loan is plest form can be interpreted to mean the term to maturity for made after May 8, 1986;5 2) the lender is not engaged in the the transaction, duration also has a specific meaning in finan- business of making loans (i.e., is not a bank/financial institu- cial vernacular. In finance it can generally be interpreted as a tion);6 and 3) the loan is denominated in U.S. Dollars.7 The AFR means for measuring how a loan’s cash flows are distributed is published via revenue rulings on a monthly basis by the IRS. over the period of the loan. For transfer pricing purposes, the There are three categories of AFR: 1) the short-term AFR for use of the word ‘‘duration’’ in the U.S. Transfer Pricing Regu- loans under three years; 2) the mid-term AFR for loans over lations may not only be a signal to account for the length of three years and under nine years; and 3) the long-term AFR for time outstanding for a debt transaction but also a signal that loans over nine years. The IRS uses U.S. government securities the timing of payments over the course of the loan should be of similar terms to calculate the AFR. As a result, the AFR is taken into account as a comparability factor. typically below arm’s length interest rates for corporate bor- rowers and lenders. Taxpayers may gravitate to employing this q Security involved: In external debt markets there exists ar- safe harbor in situations where the borrower is located outside rangements that are secured by assets, as well as arrange- the U.S. (as foreign tax authorities are unlikely to object to an ments that are not secured. Practitioners should pay careful artificially low rate) and where appetite for tax risk and compli- attention to what, if any, security underlies a potential compa- ance costs are low. Taxpayers are free to use or not use this rable transaction to ensure it most closely aligns with the in- method, assuming the requirements are met. tercompany transaction. Arm’s Length Interest Rate: Where one of the two condi- tions listed above cannot be applied or is not elected to be ap- q Credit standing of the borrower: Here, it is recognized that plied, taxpayers must select an arm’s length rate of interest that: the arm’s length interest rate for debt should reflect the cred- ‘‘(S)hall be a rate of interest which was charged, or would itworthiness or risk profile of the borrower. have been charged, at the time the indebtedness arose, in inde- pendent transactions with or between unrelated parties under q Interest rate prevailing at the situs of the lender or credi- similar circumstances. All relevant factors shall be considered, tor: The U.S. rules specifically mention that the external bor- including the principal amount and duration of the loan, the se- rowing rates for the borrower or lender should be factored as curity involved, the credit standing of the borrower, and the in- part of an analysis. Similar to looking for internal comparable terest rate prevailing at the situs of the lender or creditor for uncontrolled prices as a first step for a tangible goods trans- comparable loans between unrelated parties.’’8 action, the same should be done for an intercompany debt Where taxpayers elect to demonstrate an arm’s length result transaction. Practitioners should be able to explain major dif- without reference to the AFR or situs of the borrower ap- ferences between the firm’s various external borrowing rates proaches, an analysis rooted in comparable uncontrolled trans- and the rate determined for the intercompany transaction at actions is most commonly applied. issue.

3. Besides the determination of whether a transaction’s interest rate is at arm’s 4. If it is determined that any part of a length, what other factors does your related party transaction should not be country consider in deciding whether the characterized as debt, what are the related party financing is arm’s length consequences to both the borrower and and acceptable overall? Examples of the related lender? additional factors may include: As part of the proposed version of the 385 Regulations released contractual terms, functions of the in April 2016, the IRS and Treasury had included a rule allow- companies involved, characteristics of the ing for the bifurcation of certain related party transactions as companies’ financial products or services, part debt and part equity. This so-called ‘‘bifurcation rule’’ was economic circumstances, or business not ultimately adopted as part of the final 385 Regulations and, instead, Treasury and IRS agreed to further study this topic. As strategies. a result, in practice, related party debt transactions continue to be characterized under an ‘‘all-or-nothing’’ approach whereby a The U.S. Transfer Pricing Regulations cite specific factors to be transaction, if recharacterized, is recharacterized in its entirety. considered when determining an arm’s length interest rate for intercompany indebtedness, including:9 As in other jurisdictions, the loss of the interest expense de- q Timing:10 Accounting for the effective date of an intercom- duction for the borrower may be the most obvious transfer pany loan is important, as it recognizes that external prices pricing-related impact of the recharacterization of an instru- (i.e., interest rates) for potentially comparable debt are dy- ment as equity instead of debt. That said, there are a whole host namic and can fluctuate as market forces change over time. of potential tax ramifications in the jurisdictions of both the Thus, differences in timing between an intercompany loan lender and the borrower, depending on the facts and circum- and potentially comparable transactions may need to be con- stances. For example, the interest income and perhaps the sidered and adjusted for, if there are material implications for repaid principal may be treated as dividend income in the pricing and where an adjustment increases the reliability of lender jurisdiction. This could in turn have withholding tax the result. consequences.

76 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 5. Are there any relevant court cases or tax This case added to the ‘‘Kruse Factors’’ to create the list of rulings in your country dealing with the thirteen factors more famously used in Estate of Travis Mixon, Jr., Plaintiff-appellee, v. United States of America, Defendant- transfer pricing of intercompany financing appellant, 464 F.2d 394 (5th Cir. 1971), and it reinforced the transactions? thinking found in Fin Hay Realty Co., Appellant, v. United States of America that the factors are not a checklist to be In the U.S., most intercompany financing-related case law has counted against one another but rather a means to make a ho- dealt with the question of characterization. The following case listic assessment on a case-by-case basis. This has been fre- summaries provide key takeaways of important debt character- quently quoted in subsequent court cases in describing how the ization cases in the U.S.11 This summarized list is not intended courts use the lists of factors to make a determination. to be exhaustive, but rather illustrative of the evolution of U.S. Estate of Travis Mixon, Jr. v. United States of America – common law standards. In general, we see the evolution of a 1971 (U.S. - Court of Appeals for the Fifth Circuit) relatively consistent and applicable framework for debt charac- Though this case did not introduce any new factors (interest- terization, which has typically been in the form of a list of fac- ingly, all thirteen factors were included two years earlier in Jean tors to be employed when making a holistic assessment on a C. Tyler and Dolly Ann Tyler, Appellants, v. Laurie W. Tomlin- case-by-case basis son, District Director of Internal Revenue, Appellee, 414 F.2d The key takeaways from these cases, including the common 844 (5th Cir. 1969)), it was the first to list these factors in a row law factors relied upon, should be considered in conjunction and as such is commonly considered the baseline case for debt/ with the facts and circumstances of a specific case, as well as equity analyses in the modern era. The thirteen ‘‘Mixon Fac- the legal jurisdiction in which a specific case would be litigated tors’’ are still commonly referred to in debt characterization (e.g., circuit court). discussions. Important Debt Characterization Court Cases Rudolph A. Hardman, Frances N. Hardman and Hard- John Kelley Co. v. Commissioner – 1946 (U.S. - Supreme man, Inc. v. United States of America – 1987 (U.S. - Court of Court) Appeals for the Ninth Circuit) Although the primary conclusion reached in the case per- This case applied the precedent that substance is more im- tained to a question of jurisdiction, given the weight of the Su- portant than form to determining the characterization of a preme Court’s opinion, practitioners have clung to commentary transaction, noting, ‘‘Courts will not tolerate the use of mere in Justice Reed’s opinion that seems to imply the importance of formalisms solely to alter tax liabilities.’’ That said, the opinion certain criteria in considering debt characterization. For ex- also highlights that many transactions are structured specifi- ample, his comment that ‘‘we need not consider the effect of ex- cally for purposes of tax optimization and that this does not in treme situations such as nominal stock investments and an itself disqualify the form of the transaction, provided the sub- obviously excessive debt structure’’ appears to support a thin stance is valid. The decision also reinforced the usage (within capitalization assessment as a debt characterization criterion. the Ninth Circuit) of the eleven-factor test previously applied in As such, this case can be seen as influential in implying that O. H. Kruse Grain & Milling, Petitioner, v. Commissioner of In- thin capitalization assessments should be considered when as- ternal Revenue, Respondent, 279 F.2d 123 (9th Cir. 1960) and sessing characterization (despite the fact that the Supreme later applied in NA General Partnership v. Commissioner, T.C. Court had not intended to opine on such matters). Memo. 2012-172. Kraft Foods Company v. Commissioner of Internal Rev- NA General Partnership v. Commissioner – 2012 (U.S. – enue – 1956 (U.S.- Court of Appeals for the Second Circuit) Tax Court) This case affirmed that intercompany lending aimed at tax Prior to this case, the IRS had been relatively inactive with re- minimization and/or not issued for cash does not in and of gards to debt characterization questions and focused more on itself require recharacterization as equity. instruments owned by individuals and relating to closely held O. H. Kruse Grain & Milling v. Commissioner of Internal organizations. This case was one of multiple cases since 2012 Revenue – 1960 (U.S. - Court of Appeals for the Ninth Cir- which represented a trend of the IRS increasingly using case cuit) law to challenge interest deductions claimed by multinational This is the first court opinion to formally list key factors often corporations. Further, these cases reinforced that in this new cited in subsequent cases. ‘‘They are (1) the names given to the era of increased debt characterization scrutiny, the factor tests certificates evidencing the indebtedness; (2) the presence or ab- established in precedent were aids for holistically assessing the sence of a maturity date; (3) the source of the payments; (4) the substance and economic reality of an issuance. right to enforce the payment of principal and interest; (5) par- Illinois Tool Works Inc. & Subsidiaries v. Commissioner of ticipation in management; (6) a status equal to or inferior to Internal Revenue – 2018 (U.S. – Tax Court)12 that of regular corporate creditors; (7) the intent of the parties; In this case the court considered 14 factors drawn from two (8) ‘thin’ or adequate capitalization; (9) identity of interest be- cases not summarized above in determining whether the loan tween creditor and stockholder; (10) payment of interest only constituted bona fide debt which were. The factors considered out of ‘dividend’ money; and (11) the ability of the corporation in this case nonetheless reflect the same framework and sub- to obtain loans from outside lending institutions.’’ stance of the Mixon factors. After the court ruled that the loan Fin Hay Realty Co. v. United States of America – 1968 (U.S. consisted of bona fide debt, the court went on to reject addi- - Court of Appeals for the Third Circuit) tional arguments by the IRS that the intercompany loan should This case established frequently cited language stating that be recharacterized as a dividend under the economic substance the oft-used lists of factors are aids through which to determine doctrine, the step transaction doctrine, the conduit doctrine, the ultimate question of whether the economic reality of an in- and ‘‘Subpart F Avoidance.’’ strument truly represents genuine debt, and it applied a frame- work for considering whether a third-party lender would enter Michelle Johnson is a Managing Director in Transfer Pricing at Duff & Phelps; Perrella is a Managing Director in Transfer Pricing at Duff & into the debt transaction as constructed by the taxpayer. Phelps; Leda Zhuang is a Director in Transfer Pricing at Duff & Phelps; Jean C. Tyler and Dolly Ann Tyler v. Laurie W. Tomlinson – Michael Berbari is a Vice President at Duff & Phelps; and Zachary Held is a 1969 (U.S. - Court of Appeals for the Fifth Circuit) Vice President in Transfer Pricing at Duff & Phelps.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 77 They may be contacted at: 8 Treas. Reg. § 1.482-2(a)(2)(i). [email protected] 9 The following factors are extracted from paragraph 1.482- [email protected] 2(a)(2)(i) ‘‘Arm’s Length Interest Rate – In General’’ in the U.S. [email protected] Transfer Pricing Regulations. [email protected] 10 1.482-2(a)(2)(i) states (emphasis ours), ‘‘(A)n arm’s length rate of www.duffandphelps.com interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose.’’ 11 The summaries presented are sourced directly from an article NOTES written by Duff & Phelps titled ‘‘INSIGHT: Evolution of Common 1 A discussion of U.S. case law, including common law factors, is Law Factors Characterizing Intercompany Debt.’’ 27 Transfer Pric- provided in our response to Question 5. ing Report 496, 6/28/18. The article presents additional background 2 The effective date of Section 1.385-2 was eventually extended to not provided here for each of the cases for those looking for addi- apply to certain instruments issued on or after January 1, 2019. tional context. 3 Treas. Reg. § 1.482-2(a)(1)(ii)(A). 12 This case is not presented in our article ‘‘INSIGHT: Evolution of 4 Treas. Reg. § 1.482-2(a)(2)(ii). Common Law Factors Characterizing Intercompany Debt,’’ pub- 5 Treas. Reg. § 1.482-2(a)(2)(iii)(A)(1)(ii). lished in Bloomberg BNA, as the court’s ruling was released after 6 Treas. Reg. § 1.482-2(a)(2)(iii)(D). the article was published. 7 Treas. Reg. § 1.482-2(a)(2)(iii)(E).

78 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Transfer Pricing Forum Editorial Board and Country Panelists

Editorial Board Members Rahul Mitra Editorial Board Member and Panelist for India Partner, Dhruva Advisors LLP,India Murray Clayson Rahul K Mitra is currently a partner with Dhruva Advisors LLP, Editorial Board Member and Panelist for United Kingdom India. Prior to joining Dhruva Advisors, Rahul was the National Tax Partner, Freshfields Bruckhaus Deringer, London Head of Transfer Pricing & BEPS for KPMG in India and was Murray Clayson is a partner in Freshfields’ tax practice group the national leader of PwC India’s transfer pricing practice be- and is based in London, and leads the firm’s international trans- tween 2010 and 2014. Rahul was a partner in the tax and regu- fer pricing practice. He specializes in international tax, finance latory services practice of PwC India between April 1999 and and capital markets taxation, corporate structuring, transfer February 2015. Rahul has over 22 years of experience in han- pricing, banking and securities tax, asset and project finance, dling taxation and regulatory matters in India. He specializes in derivatives and financial products, particularly cross-border. transfer pricing, particularly inbound & outbound planning as- signments, and advises on profit/cash repatriation planning; Murray is listed in Chambers Europe, Chambers UK, The Legal value chain transformation or supply chain management proj- 500 UK, Who’s Who Legal, PLC Which Lawyer? Yearbook, Tax Di- ects; profit attribution to permanent establishments, etc. Rahul rectors Handbook, Legal Experts and International Tax Review’s independently handles litigation for top companies before the World Tax. He is a fellow of the Chartered Institute of Taxation, Income Tax Tribunals. At least 50 of the cases independently past-Chairman of the British branch of the International Fiscal argued by Rahul have been reported in leading tax journals of Association and a member of the CBI’s Taxation Committee India. Some of Rahul’s major wins before the Tax Tribunals in and International Direct Taxes Working Group. transfer pricing matters have set precedents, both in India and Murray is a graduate of Sidney Sussex College, Cambridge, globally. and holds a PhD from the University of London for research in In his personal capacity, Rahul has handled several APAs in the field of transfer pricing. He joined the firm in 1983 and has India, involving clients from across industries; and also cover- been a partner since 1993. ing complex transactions, e.g. industrial franchise fees/variable royalties under non-integrated principal structures; contract Patrick McColgan R&D service provider model; distribution models, with related Duff & Phelps LLP,Atlanta marketing intangible issues; financial transactions; profit split Patrick McColgan is a managing director in Duff & Phelps’ At- models for royalties; etc. He has been consistently rated as lanta office and part of the transfer pricing team. He has a amongst the leading transfer pricing professionals and tax liti- strong focus on assisting growth companies with their global gators in the world, by Euromoney and International Tax transfer pricing needs through the design of defensible and Review, since 2010. pragmatic solutions. Patrick has more than 11 years of transfer Rahul has been a visiting member of the faculty of the Na- pricing experience and has worked across several industries in- tional Law School in the subject of transfer pricing and interna- cluding automotive, chemical, consumer products, medical tional tax treaties, was the country reporter on the topic, ‘‘Non products, pharmaceutical, software, internet, and manufactur- Discrimination in international tax matters’’, for the IFA Con- ing. gress held in Brussels in 2008, and was invited by the OECD to speak in the 2012 Paris roundtable conference on developing Mayra Lucas Mas countries’ perspective on APAs. Editorial Board Member Advisor, Tax Treaty, Transfer Pricing & Financial Transactions Dirk van Stappen Division, Centre for Tax Policy and Administration, OECD, Editorial Board Member Paris Partner, KPMG, Antwerp/Brussels Mayra Lucas Mas has been an advisor at the Centre for Tax Dirk van Stappen is a partner with KPMG and leads KPMG’s Policy and Administration, Tax Treaty, Transfer Pricing and Fi- transfer pricing practice in Belgium. He joined KPMG in 1988 nancial Transactions Division of the OECD since June 2008. and has over 28 years of experience in advising multinational She is responsible for chairing bilateral and multilateral trans- companies on corporate tax (both domestic and international) fer pricing events at OECD for the development of the OECD and transfer pricing issues. He leads KPMG’s transfer pricing Transfer Pricing Guidelines, for the update of OECD Transfer practice in Belgium. Furthermore, Dirk is a former member of Pricing Country Developments and for OECD accession review the EU Joint Transfer Pricing Forum (2002-2015). in the field of Transfer Pricing. She also provides technical as- Since 1996, Dirk has been a visiting professor at the Univer- sistance to non-OECD economies. In the past she has worked sity of Antwerp (Faculty Applied Economics, UA) teaching Tax as a senior consultant for the transfer pricing group of a lead- to Master students. He has been named in International Tax Re- ing accounting firm and in the Taxation and Customs Union view’s ‘‘World Tax –The comprehensive guide to the world’s unit of the European Commission. leading tax firms’’, Euromoney’s (Legal Media Group) ‘‘Guide to Mayra is a graduate of New York University School of Law the World’s Leading Transfer Pricing Advisers’’ and Euromon- (LLM), the University of Barcelona (Ph.D in Tax Law and Law ey’s ‘‘Guide to the World’s Leading Tax Advisers.’’ Degree.) She has been a lecturer in tax law at the University of He is a certified tax adviser and member of the Belgian Insti- Barcelona, and a Research Fellow at the European Tax College tute for Accountants and Tax Advisers and of the International at K.U. Leuven. Fiscal Association.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 79 Country Panelists and has over 28 years of experience in advising multinational companies on corporate tax (both domestic and international) and transfer pricing issues. He leads KPMG’s transfer pricing Argentina practice in Belgium. Furthermore, Dirk is a former member of the EU Joint Transfer Pricing Forum (2002-2015). Since 1996, Cristian E. Rosso Alba Dirk has been a visiting professor at the University of Antwerp Rosso Alba, Francia & Asociados, Argentina (Faculty Applied Economics, UA) teaching Tax to Master stu- Cristian Rosso Alba has a well-recognized experience in Tax dents. He has been named in International Tax Review’s ‘‘World Law, with particular emphasis in domestic and international Tax –The comprehensive guide to the world’s leading tax firms’’, tax planning, restructurings, reorganizations and international Euromoney’s (Legal Media Group) ‘‘Guide to the World’s Lead- business transactions. He leads the Tax Law practice of Rosso ing Transfer Pricing Advisers’’ and Euromoney’s ‘‘Guide to the Alba, Francia & Abogados. World’s Leading Tax Advisers.’’ He is a certified tax adviser and Additionally, Mr. Rosso Alba has been a regular lecturer in member of the Belgian Institute for Accountants and Tax Advis- the United States and speaker in domestic and international tax ers and of the International Fiscal Association. conferences and is the author of more than eighty articles ap- pearing in specialised publications. Cristian Rosso Alba is a member of the American Bar Association (ABA), Harvard Club Yves de Groote of Argentina, the Canadian Tax Foundation and the Advisory Director, KPMG, Antwerp Board of the Argentine Chamber of Commerce. Mr. Rosso Alba has been recommended as one of the ‘‘Leaders in their Field’’ Yves de Groote is a LL.M from King’s College London, MSc. (Tax - Argentina) by Chambers Latin America. HUB; he joined KPMG in 2004 and has over 10 years of experi- ence in advising multinational organizations on transfer pric- Australia ing issues. He has been involved in and conducted various tax planning and transfer pricing assignments, ranging from the Stean Hainsworth preparation of European and global transfer pricing documen- Director, Duff & Phelps, Australia tation (including functional and economic analyses and com- parables searches), domestic and international transfer pricing Stean Hainsworth is the Director of Transfer Pricing at Duff & audit defense to the negotiation of (uni-, bi- and multilateral) Phelps based in Australia and has over 20 years of legal and tax rulings and advance pricing arrangements (APAs). experience, specializing in transfer pricing. Previously he was a Director of an international transfer pricing firm, at a global ad- visory firm as the transfer pricing leader for Asia, and worked Eugena Molla as a senior transfer pricing specialist for a Big 4 firm in New Senior Adviser, KPMG, Antwerp Zealand, Canada and Australia. Eugena Molla, MSc University of Bologna, is a Senior Tax Ad- Austria viser with KPMG in Belgium, specializing in global transfer pricing services. She has assisted multinational clients in mat- Alexandra Dolezel ters such as transfer pricing planning, global documentation Tax Director, BDO Austria GmbH, Vienna and dispute resolution. Eugena also gained experience in Alexandra Dolezel has been a Tax Director in the Vienna, Aus- global restructuring and supply chain management projects, as tria, practice of PricewaterhouseCoopers since 2011. There, she well as unilateral / bilateral advance pricing arrangements specializes in transfer pricing; international tax structuring and (APAs) for multinational companies in a range of sectors. value chain transformation; and mergers and acquisitions. In addition, she is a lecturer on European Union tax law and com- Brazil parative tax law at FH Campus Wien, the largest university in Austria. Prior to joining PricewaterhouseCoopers, she was Head of Corporate Taxes for Borealis AG, where she had over- Jerry Levers de Abreu all responsibility for group corporate tax, including matters af- Partner, TozziniFreire Advogados, Sao Paulo fecting tax risk management, transfer pricing and international structures. Ms. Dolezel received her education at the Vienna Jerry Levers de Abreu is a Partner at TozziniFreire Advogados, University of Economics and Business Administration, and she Sao Paulo. is also a member of the Austrian Chamber of Accountants.

Tanja Roschitz Lucas de Lima Carvalho Consultant, Transfer Pricing, PwC, Vienna Senior Tax Associate, TozziniFreire Advogados, Sao Paulo

Tanja Roschitz is a transfer pricing consultant at Pricewater- Mr. Carvalho is a Tax Associate with TozziniFreire Advogados, houseCoopers. Sao Paulo. In addition to his practice, he is a teacher and lec- turer, and a frequently published author. He holds an LL.M. in Belgium International Taxation from New York University School of Law; an LL.M. in Corporate Law from the Instituto Brasileiro Dirk van Stappen de Mercado de Capitais (IBMEC); an International Executive Partner, KPMG, Antwerp/Brussels MBA from the Chinese University of Hong Kong; an MBA in Dirk van Stappen is a partner with KPMG and leads KPMG’s Taxation from Fundacao Getulio Vargas (FGV), and an LL.B. transfer pricing practice in Belgium. He joined KPMG in 1988 (magna cum laude) from Federal University of Ceara.

80 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Canada Associate with a global law firm in the Netherlands and, prior to that, as Head of Tax with a Brazilian law firm. Richard Garland Partner, Deloitte LLP,Toronto Denmark Richard Garland is a partner in the Toronto office of Deloitte. He is a Chartered Professional Accountant and has over 25 Arne Møllin Ottosen years of accounting experience focused in the area of corporate Partner and Head of Tax Law, Kromann Reumert, international taxation. Richard has assisted clients in all as- Copenhagen pects of international taxation, with particular emphasis on tax Arne Møllin Ottosen is Head of Kromann Reumert’s tax law treaty issues, cross border financing structures and transfer group. He specialises in contentious tax including transfer pric- pricing. Over the past several years, Richard’s work has been fo- ing, tax litigation and business taxation advisory work. Arne is cused in the area of transfer pricing, and he has been repeatedly the author of numerous Danish and international articles on recognized in Euromoney’s guide to leading transfer pricing tax and company law. practitioners. Arne is listed in the International Tax Review, European legal China 500 and Chambers. He holds a Law degree, Aarhus University (cand.jur. 1993). LL.M., King’s College, University of London (1999). Cheng Chi Partner-in-Charge for China and the Hong Kong SAR, KPMG, Shanghai Casper Jensen Attorney, Kromann Reumert, Copenhagen Based in Shanghai, Cheng Chi is the partner-in-charge of KPMG’s Global Transfer Pricing Services for China and Hong Casper Jensen is an attorney and a member Kromann Re- Kong S.A.R. Mr. Chi has led many transfer pricing and tax effi- umert’s tax law group. He specializes in corporate and interna- cient supply chain projects in Asia and Europe, involving ad- tional tax matters. Casper is the author of numerous articles on vance pricing arrangement negotiations, cost contribution international taxation. He holds a law degree, University of Co- arrangements, Pan-Asia documentation, controversy resolu- penhagen (cand.jur. 2013). tion, global procurement structuring, and headquarters ser- vices recharges for clients in the industrial market including France automobile, chemical, and machinery industries, as well as the consumer market, logistic, communication, electronics and fi- Julien Monsenego nancial services industries . Partner in Tax Law, Olswang LLP,Paris In addition to lecturing at many national and local training events organised by the Chinese tax authorities, Mr. Chi has Julien Monsenego specialises in international taxation, tax provided technical advice on a number of recent transfer pric- treatment of M&A and restructurings. He assists French and ing legislative initiatives in China. A frequent speaker on trans- foreign companies in their international investments as well as fer pricing and other matters, his analyses are regularly in the course of their tax audits and litigations. He particularly featured in tax and transfer pricing publications around the focuses on Life Science and R&D-intensive industries. He has world i.e. International Tax Review). Mr. Chi has been recom- extended practice of transfer pricing and has intervened for mended as a leading transfer pricing advisor in China by the French and non-French groups in setting-up intra-group flows, Legal Media Group. IP companies and business restructurings. Mr. Chi started his transfer pricing career in Europe with an- Before joining Olswang, Julien Monsenego previously other leading accounting firm covering many of Europe’s major worked at Arthur Andersen International, Ernst & Young, jurisdictions while based in Amsterdam until returning to Coudert Brothers and Dechert LLP. Mr. Monsenego is a China in 2004. member of the Paris Bar.

Rafael Triginelli Miraglia Guillaume Madelpuech Senior Manager, KPMG, Shanghai, China Principal (Transfer Pricing), NERA Economic Consulting, Paris Rafael Triginelli Miraglia is a Senior Tax Manager with the Global Transfer Pricing Team of KPMG China and member of Mr. Madelpuech holds a MBA from the ESSEC Business School the firm’s BEPS Center of Excellence. His practice focuses on and an MSc in Economics from the Paris Dauphine University. design and implementation of transfer pricing systems, busi- He is a Principal within NERA Economic Consulting in Paris. ness restructuring advice, value chain analysis and planning He is an economist with 10 years of experience in transfer pric- and outbound investments. Rafael is graduated in Law (Univer- ing, including in particular intangible valuation, business re- sidade Federal de Minas Gerais, Brazil, 2004) and has obtained structuring, transfer pricing policy design and litigation. Mr. the degrees of Master of Laws (Pontificia Universidade Catolica Madelpuech has conducted a number of transfer pricing proj- de Minas Gerais, Brazil, 2008) and LL.M. of Advanced Studies ects for multinationals in a wide range of industries, including in International Tax Law (ITC-Leiden University, the Nether- high-tech, consumer goods, automotive, luxury goods, finan- lands, 2011). He is a Transfer Pricing Lecturer at the ITC- cial services, health care, real estate, media and entertainment, Leiden University and has taught courses in Tax and and energy. He is a regular contributor to the OECD and a fre- Constitutional Law at Pontificia Universidade Catolica de quent contributor to journals and trade publications. Prior to Minas Gerais. Rafael is a member of the Brazilian Bar Associa- joining NERA, Mr Madelpuech was an economist with EY, in tion (Ordem dos Advogados do Brasil) since 2005. Before join- both Paris and in New York City, in the transfer pricing and ing KPMG China, Rafael worked between 2011 and 2015 as Tax valuation groups.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 81 Germany of Science in Finance and International Business (Magna Cum Laude) from the NYU Stern School of Business. Alexander Voegele Chairman, NERA Economic Consulting, Frankfurt India During more than 25 years advising international corporations and leading law firms on transfer pricing issues, Alexander Rahul Mitra Voegele has specialised in the development of innovative eco- Partner, Dhruva Advisors LLP,India nomic structures for transfer pricing strategies and for the de- Rahul K Mitra is currently a partner with Dhruva Advisors LLP, fense of major international transfer pricing cases. He has led India. Prior to joining Dhruva Advisors, Rahul was the National hundreds of large transfer pricing projects and defense cases Head of Transfer Pricing & BEPS for KPMG in India and was for a variety of clients in a range of industries. Prior to joining the national leader of PwC India’s transfer pricing practice be- NERA, Dr Voegele was a partner with PriceWaterhouse and tween 2010 and 2014. Rahul was a partner in the tax and regu- KPMG, where he was in charge of their German transfer pric- latory services practice of PwC India between April 1999 and ing practice. February 2015. Rahul has over 22 years of experience in han- He holds a doctorate in economics and a Master of tax and dling taxation and regulatory matters in India. He specializes in business administration from the University of Mannheim. He transfer pricing, particularly inbound & outbound planning as- is a certified German auditor and tax adviser and is a French signments, and advises on profit/cash repatriation planning; Commissaire aux Comptes. value chain transformation or supply chain management proj- He has received numerous awards as a transfer pricing ad- ects; profit attribution to permanent establishments, etc. Rahul viser and has frequently been ranked as a leading tax and trans- independently handles litigation for top companies before the fer pricing professional. Income Tax Tribunals. At least 50 of the cases independently argued by Rahul have been reported in leading tax journals of Philip de Homont India. Some of Rahul’s major wins before the Tax Tribunals in Senior Consultant/Principal, NERA Economic Consulting, transfer pricing matters have set precedents, both in India and Frankfurt globally. Philip de Homont specializes in complicated transfer pricing In his personal capacity, Rahul has handled several APAs in audits and the valuation of intellectual property for interna- India, involving clients from across industries; and also cover- tional corporations and law firms. He has defended major ing complex transactions, e.g. industrial franchise fees/variable transfer pricing cases throughout Europe and the Americas in royalties under non-integrated principal structures; contract a wide range of industries from consumer goods to financial R&D service provider model; distribution models, with related services. marketing intangible issues; financial transactions; profit split He holds a MSc in Economics from the University of War- models for royalties; etc. He has been consistently rated as wick and a Masters-equivalent in Physics from the Technische amongst the leading transfer pricing professionals and tax liti- Universita¨t Mu¨ nchen. gators in the world, by Euromoney and International Tax Review, since 2010. Philip de Homont is the co-author of dozens of articles and two books on transfer pricing and intellectual property valua- Rahul has been a visiting member of the faculty of the Na- tion. He has participated in various transfer pricing confer- tional Law School in the subject of transfer pricing and interna- ences. tional tax treaties, was the country reporter on the topic, ‘‘Non Discrimination in international tax matters’’, for the IFA Con- Hong Kong gress held in Brussels in 2008, and was invited by the OECD to speak in the 2012 Paris roundtable conference on developing countries’ perspective on APAs. Irene Lee Director, KPMG Global Transfer Pricing Services, Hong Kong Ireland Irene Lee has practiced tax for 11 years, the last 7 specializing in transfer pricing matters involving the financial services sector. She joined KPMG in Hong Kong in 2013, and advises Catherine O’Meara banking, asset management, and insurance clients on transfer Partner, Matheson, Dublin pricing policies, documentation, and risk management in the Catherine is a partner in the tax department at Matheson. Cath- Asia region. She earned a Bachelors of Business Administra- erine has over ten years’ experience advising multinational cor- tion (B.B.A.) degree from the Chinese University of Hong Kong, porations doing business in Ireland on Irish corporate tax. and has studied at the University of North Carolina (Chapel Catherine has a particular interest in transfer pricing, compe- Hill). tent authority matters and business restructurings and also has extensive experience in structuring inward investment projects, Jeffrey Wong mergers and acquisitions and corporate reorganisations. Cath- Manager of Global Transfer Pricing Services, KPMG Hong erine’s clients include many of the leading multinational corpo- Kong rations established in Ireland, primarily in the pharmaceutical, Jeffrey Wong is a Manager of Global Transfer Pricing Services healthcare, ICT and consumer brand sector. Catherine has pub- at KPMG in Hong Kong. He is an experienced financial services lished articles in leading tax journals, is co-author on the Ire- transfer pricing advisor and works with clients from the bank- land section of the Bloomberg BNA TP Forum and is co-author ing, insurance, and asset management sectors. Jeffrey joined of the Ireland chapter of the International Fiscal Association KPMG in Hong Kong in 2014 and has been based in Hong Cahiers on Cross Border Business Restructuring. Kong for over seven years. He also worked as a transfer pricing Catherine is a Chartered Tax Advisor and a member of the specialist in New York for over two years. He holds a Bachelor Law Society of Ireland.

82 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Israel Japan

Yariv Ben-Dov Takuma Mimura Head of Transfer Pricing at Lion Orlitzky & Co. – Moore Cosmos International Management Co., Ltd Stephens Israel Yariv Ben-Dov is Head of Transfer Pricing at Lion Orlitzky & Takuma Mimura is Managing Director of Cosmos- Co. – Moore Stephens Israel. Prior to that, he was Head of International Management, a transfer pricing boutique con- Transfer Pricing and Valuations Department at Herzog, Fox & sulting firm in Japan. He has more than 14 years of transfer Neeman. He is an expert in drafting and defending transfer pricing experience, including 6 years at Deloitte Touche Tohm- pricing studies and intercompany agreements, with over 15 atsu (both Tokyo and New York), and international banking ex- years of experience. Yariv counsels both multinational con- perience prior to transfer pricing. He has worked extensively glomerates and small start-ups on their transfer pricing mat- with transfer pricing issues worldwide and is especially experi- ters, including multinationals which have no activity in Israel. enced in Japan, U.S. and China Transfer Pricing matters. He Prior to joining HFN, Yariv was a co-founder of Bar-Zvi & Ben- has also worked with a broad range of clients in manufactur- Dov, a boutique law firm specializing in transfer pricing and ing, financial services and telecommunications and has as- high-tech, and prior to that Yariv served as the Head of the sisted many taxpayers in negotiations with the Japanese tax Transfer Pricing Unit in Teva Pharmaceuticals. Yariv has pub- authorities on transfer pricing audit examinations. lished articles in the subject of transfer pricing and has been asked to keynote as an expert in transfer pricing at several con- Takuma has authored articles for professional journals in- ventions in Israel, Europe and the U.S. cluding BNA Transfer Pricing Report and Monthly Interna- tional Taxation of Japan, and is a frequent speaker on transfer Yariv is a member of Transfer Pricing Associates, the world’s pricing topics. largest network of independent transfer pricing experts, a member of the Israeli Bar Tax Committee, and of the Board of the Israeli-LATAM Chamber of Commerce. Yariv is also a Board Korea member of the Arthur Rubinstein Music Society and the head of the Society’s NYC branch. Yariv counsels (pro bono) to the Dr. Tae Hyung Kim Israeli Navy Association. Yariv speaks Hebrew, English, Transfer Pricing, Korea French, and Italian, and has often advised global clients in their local language. Dr. Tae-Hyung Kim is a former senior partner and national leader of the Global Transfer Pricing Group at Deloitte Korea. Italy Over more than 14 years, Dr. Kim has represented multina- tional corporations in various industries in transfer pricing Marco Valdonio audit defense, advance pricing agreement negotiations, mutual Partner, Maisto e Associati, Milan agreement procedures, and planning and documentation stud- ies. Marco Valdonio was admitted to the Association of Chartered Accountants in 2002. He joined Maisto e Associati in 2000, after Prior to his previous position, Dr. Kim headed the national working for another tax law firm and has become partner since transfer pricing practice at other Big Four firm in Korea and 2011. He headed the London office from 2002 to 2004. His the Law and Economics Consulting Group in Korea. Before areas of expertise comprise transfer pricing, definition of tax specializing in transfer pricing, Dr. Kim was a research fellow controversies through settlement procedures, mergers and ac- for the Korea Institute for International Economic Policy quisitions, financial instruments and international taxation. (KIEP). During his tenure at the KIEP, he advised the Ministry of Finance and Economy, the Ministry of Commerce, Industry, and Energy and the Ministry of Foreign Affairs in the area of in- Aurelio Massimiano ternational trade and investment policies. Partner, Maisto e Associati, Milan Aurelio Massimiano is a partner at Maisto e Associati, where he Dr. Kim’ s recent publications appear in IBFD’s International has practiced since 2005, after having worked for the Interna- Transfer Pricing Journal, BNA Tax Management’s Transfer Pric- tional Tax Office of the Italian Revenue Agency, and prior to ing Reports, and Euromoney’s Transfer Pricing Reviews. His that, for a Big 4 accounting firm. His areas of expertise are in- economics publications also appear in Canadian Journal of ternational taxation and transfer pricing. He is the permanent Economics and Review of International Economics. assistant of Professor Guglielmo Maisto at the EU Joint Trans- He holds a Ph.D. in economics from the University of Wash- fer Pricing Forum. A member of the Association of Chartered ington and is a graduate of Advanced Management Programs of Accountants, he holds degrees from Luiss Guido Carli Univer- both Harvard Business School and Seoul National University. sity in Rome, and an LL.M. in International Tax Law from the University of Leiden, The Netherlands. Seong Kwon Song Head of Transfer Pricing Group, Deloitte Korea Mirko Severi Associate, Maisto e Associati, Milan Mr. Seong Kwon Song, former Assistant Commissioner for In- Mirko Severi joined Maisto e Associati in 2011 after obtaining ternational Tax Investigation and Head of the Competent Au- a Master Diploma in Tax Law at IPSOA. He graduated (cum thority at the Korean National Tax Services (KNTS) leads the laude) in Economics from the University of Parma, in 2010. His Deloitte transfer pricing group in Korea. The group has over 40 areas of expertise include corporate taxation and group taxa- specialists including ex-KNTS officers and economists with tion. global background.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 83 Luxembourg Armando Cabrera Partner, Baker & McKenzie, Mexico City

Peter Moons Armando Cabrera-Nolasco is a partner in Baker McKenzie’s Tax Partner and Head of the Transfer Pricing Team, Loyens & Tax Practice Group in Guadalajara. He has 10 years of experi- Loeff, Luxembourg ence in transfer pricing issues. Mr Cabrera- Nolasco currently coordinates the transfer pricing services for financial and ser- Peter Moons is a partner in the tax practice of Loyens & Loeff vices industries, and the financial valuation practice. Luxembourg since 2004, with a focus on corporate tax advice Mr. Cabrera-Nolasco’s practice focuses on transfer pricing for multinationals and funds, in particular private equity funds, documentation for tax compliance; pricing strategies and their initiators and their investors. Before joining the Luxem- benchmarking analysis by product, industry, country and bourg office in 2004, he practiced in the Rotterdam and Frank- region; defense in litigation; and alternative dispute resolution furt offices of Loyens & Loeff, specializing in real estate funds of any transfer pricing matter in Mexico and Latin America. and cross-border tax structuring. Peter is also active in the Loyens & Loeff German and Eastern European desks and Jorge Ramirez heads the Luxembourg transfer pricing team. Peter is a Associate, Baker & McKenzie, Mexico City member of the Luxembourg Bar, the International Fiscal Asso- Jorge Ramirez Dorantes is a member of the Latin America ciation (IFA) and of the tax committee of the Luxembourg Pri- Transfer Pricing Group. He has been a transfer pricing practi- vate Equity and Venture Capital Association. Peter is the author tioner for over six years, with involvement in transfer pricing of Tax Management Portfolio, Business Operations in Luxem- consulting/restructuring, economic analysis and valuation, bourg, published by Bloomberg Tax. He received a Business controversy support (audit and litigation defense), transfer economics and tax law degree from Erasmus University in Rot- pricing documentation, and negotiations with various tax au- terdam in 1996 and Tax law degree from University of Cologne thorities in the Latin America region. in 1997. Mr. Ramirez Dorantes has worked with clients in a broad range of industries, with considerable experience in transac- tions for the aerospace, retail and services industries. He has Gaspar Lopes Dias also participated in the negotiation of APAs for the maquila- Tax Advisor and Transfer Pricing Specialist, Loyens & Loeff, dora industry, and advising on the tax efficiency of supply chain Luxembourg operations. Aside from consulting projects, Mr. Ramirez Gaspar Lopes Dias is an associate in the tax practice group of Dorantes has substantial experience in the successful resolu- tion of marketing intangibles audits. Loyens & Loeff Luxembourg. He specializes in international taxation and transfer pricing, Gaspar advises on financial The Netherlands transactions (e.g. cash pool, debt pricing) and on intra-group services. Prior to joining our Transfer Pricing team, Gaspar worked at a big 4 company in Belgium, having gained experi- Danny Oosterhoff ence in several industries and in a broad range of transfer pric- Partner, Ernst & Young Belastingadviseurs LLP,Amsterdam, ing matters, including TP documentation, IP structuring and Netherlands arm’s length license fees, relocation of functions, MAP/EU Arbi- Danny Oosterhoff is a Partner at Ernst & Young Belastingadvi- tration Convention and EU State Aid rules on transfer pricing. seurs LLP. He received a degree in Advanced Transfer Pricing from ITC Leiden, an advance LLM in European and International Taxa- Olga Shambaleva tion from Tilburg University, and a law degree from Nova Uni- Senior Manager at Transfer Pricing & Operating Model versity of Lisbon. Effectiveness group, Ernst & Young Belastingadviseurs LLP, Amsterdam, Netherlands Mexico Olga Shambaleva is a a Senior Manager at Ernst & Young Be- lastingadviseurs LLP.

Moises Curiel Garcia New Zealand Principal-Director of the Latin American Transfer Pricing Practice, Baker & McKenzie, Mexico City Leslie Prescott-Haar Moise´s Curiel is a member of the Firm’s Transfer Pricing Prac- Managing director, TP EQuilibrium | AustralAsia LP tice Group. He is recognized by International Tax Review as (‘‘TPEQ’’) one of Mexico’s top tax advisers, and has served as the Transfer Leslie is the managing director of TP EQuilibrium | AustralAsia Pricing Audits and Resolutions administrator of Mexico’s Min- LP (‘‘TPEQ’’) (formerly, Ceteris New Zealand). TPEQ provides istry of Finance and Public Credit for seven years. Mr. Curiel transfer pricing services in Australia and New Zealand, across helped prepare and implement various tax transfer pricing an extensive range of industries, transactions and engage- rules in Mexico, including the Income Tax Law, the Omnibus ments, including APAs; independent second opinions and Tax Ruling and the Federal Tax Code. He also led the Advance expert advice; tax authority reviews, investigations and audit Pricing Agreements Program in Mexico, where he negotiated defence; global, regional and country-specific documentation; over 300 unilateral agreements and 34 bilateral agreements. etc. Leslie has over 22 years of specialised transfer pricing ex- His impressive track record also includes proposing amend- perience based in the APac Region (Sydney and Auckland), and ments to legislation on various matters for Latin American an additional 10 years of corporate taxation experience in Big 4 countries, and representing Mexico before the OECD for the accounting firm practices specialising in mergers, acquisitions, transfer pricing party (WP6). bankruptcies and reorganisations based in the United States

84 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 (New York City and Chicago). Prior to forming TPEQ, Leslie various areas of taxation and conducting business in Russia, commenced the transfer pricing practice of Ernst & Young structuring investments, and coordinating approaches to tax New Zealand, where she served as the National Leader for a planning. Since 2007 Evgenia has been focusing on transfer number of years. Leslie frequently provides ‘thought leader- pricing. She has led transfer pricing planning and documenta- ship’ contributions to various international publications and tion projects for multinational and Russian clients in various associations. industry sectors, including structuring of entry/exit strategies of clients from the transfer pricing perspective, adaptation of Stefan Sunde global transfer pricing policies to Russian requirements, busi- Senior Analyst, TPEQ ness restructuring, development of sustainable transfer pricing methodologies, etc. Evgenia specialises on serving companies Stefan is a Senior Analyst at TPEQ. He joined TPEQ in 2013 in working in retail, consumer products and life science indus- a university internship role, and since such time has worked on tries. She is currently a Partner in the Transfer Pricing Group major projects for most of the practice’s major client base and for Ernst & Young in Moscow. all industries, and has managed some more recent projects. Stefan completed his tertiary studies in 2014 and has since worked for the firm in a full-time capacity. Ibragim Khochaev Manager, Transfer Pricing Services, Ernst & Young, Moscow Sophie Day Ibragim is a Manager with the EY Transfer Pricing Group in Analyst, TPEQ Moscow. He has specialized in transfer pricing for more than 5 Sophie is an Analyst at TPEQ. She has over a year of transfer years, and has actively participated in transfer pricing projects pricing experience since joining TPEQ in July 2015, working for foreign and Russian companies from various industries, in- across various industries and projects for TPEQ’s client base. cluding FMCG, chemical, Oil & Gas, automotive, pharma, etc. Sophie completed her tertiary studies in 2016 and has since Ibragim has broad experience in conducting benchmarking worked for the firm in a full-time capacity. studies, preparing TP documentations, designing the TP meth- odologies, business restructuring, intangible assets and intra- Portugal group financial transactions analysis. He graduated with honors from All-Russian State Tax Academy of the Ministry of Finance of the Russian Federation and holds a degree in Taxes Patricia Matos and Taxation. Ibragim is currently studying for a Ph.D degree Associate Partner at Deloitte & Associados SROC, S.A., at the Plekhanov Russian University of Economics. Lisbon

Patrı´cia Matos is currently Associate Partner in Deloitte’s Singapore Lisbon office in the transfer pricing department. Patrı´cia has a business degree and is a chartered accountant. Peter Tan She started her professional career in Arthur Andersen (Arthur Senior Consultant (Tax and Transfer Pricing), Baker & Andersen, S.A., presently Deloitte & Touche as result of an ef- McKenzie Wong & Leow, Singapore fective association of both firms since April 2002) in 1997 and was promoted to Associate Partner in 2008. Peter Tan leads the Baker & McKenzie Transfer Pricing prac- Patrı´cia has extensive experience in tax planning, due dili- tice in Singapore. He was called to the Bar of England and gence and tax compliance for Portuguese and Multinational Wales in 1976, and started his tax career in London, continuing companies. In 2002, she began working exclusively in transfer it in Singapore. Mr. Tan advises multinational companies from pricing. She advises clients in several aspects of transfer pric- various industries on tax issues related to mergers and acquisi- ing, ranging from tax audits to comprehensive transfer pricing tions, group and business restructuring, joint venture projects, planning, structuring of intercompany transactions and defen- intellectual property, franchising and distribution transactions, sive documentation. technical services arrangements and licensing, and financial Her experience spans a wide range of industries including products. He also assists clients in obtaining tax incentives. Mr. communications, technology, media, financial services, auto- Tan also has extensive experience in tax dispute resolution. A motive, consumer goods, tourism and pharmaceuticals. member of the Middle Temple Inn of Court in England and Patrı´cia has been a speaker at several seminars and confer- Wales, Mr. Tan is also an Accredited Tax Advisor in the Singa- ences on tax, economic and transfer pricing issues. pore Institute of Accredited Tax Professionals.

Henrique Sollari Allegro Michael Nixon Manager, Partner at Deloitte & Associados SROC, S.A., Director of Economics (Transfer Pricing), Baker & McKenzie Lisbon Wong & Leow, Singapore Henrique is currently a Manager in Deloitte’s Lisbon office in An economist with 16 years of experience in transfer pricing the transfer pricing department. consulting and academia, Michael Nixon’s experience includes transfer pricing and business restructuring projects in the U.K., Russia Germany, the Netherlands and Singapore, where he has been based for the last six years. He has advised multinationals across various industries throughout the planning, compliance Evgenia Veter and audit cycle. His practice is focused on transfer pricing con- Ernst & Young, Moscow troversy, intellectual property valuations and business restruc- Evgenia joined the firm as a partner in March 2011. Before that turing. He is a member of the Singapore Transfer Pricing she worked for more than 15 years with another Big Four com- consultation group with the Inland Revenue Authority of Sin- pany where she obtained extensive experience in providing ad- gapore (IRAS), and has undertaken training for the IRAS Tax visory services to Russian and international companies on Academy. He also consults with Singapore academic institu-

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 85 tions on transfer pricing and business restructuring matters. Switzerland Mr. Nixon has a Bachelor of Arts Economics degree from Not- tingham Trent University and a Master of Science Economics Maurizio Borriello (with distinction) from the University of London. He is a Director, Transfer Pricing and Value Chain Transformation, member of the Chartered Institute of Taxation in the U.K., and PwC, Zurich, of the Society of Financial Advisors in the U.K.. Maurizio Borriello is a Director in the Transfer Pricing and Value Chain Transformation Team in Zu¨ rich, Switzerland. He Spain graduated with a Bachelor of Arts in International Business from the University of Applied Sciences Aalen, Germany. Mau- rizio has been working in transfer pricing for almost ten years. Montserrat Trape Global Transfer Pricing Services, Partner, Tax Department, Michelle Messere KPMG Abogados, Spain Consultant, Transfer Pricing and Value Chain Transformation, PwC, Zurich Ms. Trape´ joined KPMG in 2007 and has worked on numerous Michelle Messere is a Consultant in the Transfer Pricing and transfer pricing projects including transfer pricing policy Value Chain Transformation team based in Zurich, Switzer- design, documentation work, APA negotiations as well as audit land. She graduated in Law and Accounting in Brazil and is an defence and recourse in transfer pricing cases and interna- admitted attorney at the Brazilian Bar Association. She is cur- tional taxation. Her work has spanned the financial, consumer rently studying the LL.M of International Contracts and Arbi- products, energy and pharmaceutical sectors. tration at the University of Fribourg, Switzerland. Prior to joining KPMG, Montserrat Trape´ worked at the United Kingdom Spanish Revenue Service. As Co-Director of International taxa- tion she was responsible for negotiating several multilateral and bilateral APAs, judicial defence of TP assessments as well Murray Clayson as actively participating in the new transfer pricing legislation. Editorial Board Member and Panelist for United Kingdom Tax Partner, Freshfields Bruckhaus Deringer, London Ms. Trape´ was also Vice-Chair of the European Union Joint Transfer Pricing Forum for four years. During this period, the Murray Clayson is a partner in Freshfields’ tax practice group JTPF worked on recommendations for the effective implemen- and is based in London, and leads the firm’s international trans- tation of the Arbitration Convention, on a transfer pricing fer pricing practice. He specializes in international tax, finance model documentation to simplify documentation compliance and capital markets taxation, corporate structuring, transfer requirements and on a report on best practices for APA within pricing, banking and securities tax, asset and project finance, Europe. derivatives and financial products, particularly cross-border. Murray is listed in Chambers Europe, Chambers UK, The Legal Montserrat Trape´ is also a Visiting Professor at ESADE Insti- 500 UK, Who’s Who Legal, PLC Which Lawyer? Yearbook, Tax Di- tuto de Estudios Fiscales, where she has conducted several rectors Handbook, Legal Experts and International Tax Review’s training courses for Spanish & Latin American Tax Authorities World Tax. He is a fellow of the Chartered Institute of Taxation, in Madrid. She is a frequent public speaker and contributor to past-Chairman of the British branch of the International Fiscal articles and books on transfer pricing, dispute resolution Association and a member of the CBI’s Taxation Committee mechanisms and international taxation issues. and International Direct Taxes Working Group. Murray is a graduate of Sidney Sussex College, Cambridge, and holds a Ms. Trape´ has been included in the list of 2009 and 2010 ‘‘Best PhD from the University of London for research in the field of lawyers’’ in Spain. transfer pricing. He joined the firm in 1983 and has been a part- ner since 1993. Elisenda Monforte Andrew Cousins Partner, Global Transfer Pricing Services, KPMG, Spain Director, Duff & Phelps, London, United Kingdom Elisenda Monforte is a Partner in KPMG’s Global Transfer Pric- Andrew is an international tax practitioner in the Duff & Phelps ing Services practice. She joined KPMG in the U.S. in 2007, and Transfer Pricing practice, with more than 20 years of cross- has been part of the Spanish practice since 2011. Elisenda has border experience in private practice, industry and in govern- extensive experience in the financial services industry, with a ment. He brings a comprehensive regulatory, commercial and focus on banking and insurance, and funding transactions for advisory perspective to the fields of transfer pricing and busi- non-financial clients. She has been involved in operational ness restructuring, with a focus on practical implementation. transfer pricing engagements, and analyzed the effective imple- Before joining Duff & Phelps Andrew was Deputy Comptroller of Taxes in the Jersey tax authority, acting as competent author- mentation of transfer pricing policies for IP licenses and ser- ity for all of Jersey’s international tax agreements. He also vices, as well as assisting clients in tax audits and the served as Jersey’s delegate to the Global Forum on Transpar- negotiation of APAs. Elisenda has been a lecturer both in inter- ency and Exchange of Information for Tax Purposes, as well as nal training and external sessions at ESADE and Centro de Es- representing Jersey at the OECD’s Global Forums for Transfer tudios Fiscales, and has co-authored a number of articles on Pricing and for Tax Treaties. Andrew spent eight years in indus- the Spanish transfer pricing environment. She has also been a try as a global head of transfer pricing, and has led the transfer teaching assistant at NYU’s Stern School of Business and Col- pricing practice in two FTSE 100 FMCG multinationals. lege of Arts and Sciences. Elisenda is a graduate of Universitat Andrew is a graduate of Oxford University and is a fellow of Pompeu Fabra (BA in Law ’05, BA in Economics ’03) and NYU the Institute of Chartered Accountants in England and Wales. (MA in Economics ‘06). He qualified as a chartered accountant at Deloitte before focus-

86 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 ing on transfer pricing at Ernst & Young, where he was a transfer pricing needs through the design of defensible and member of its Tax Effective Supply Chain Management team. pragmatic solutions. Patrick has more than 11 years of transfer pricing experience and has worked across several industries in- United States cluding automotive, chemical, consumer products, medical products, pharmaceutical, software, internet, and manufactur- Jeffrey S. Korenblatt ing. Reed Smith LLP,Washington, D.C. Jeffrey S. Korenblatt is a tax attorney with more than 15 years Emily Sanborn of experience. He has a broad-based transactional tax practice Duff & Phelps LLP,Altanta and focuses on international tax planning and transfer pricing. Emily Sanborn is a director in the Atlanta office of Duff & Jeff delivers tax solutions to clients in multiple industries, in- Phelps’ Transfer Pricing practice. Emily has more than nine cluding, but not limited to, manufacturers, retailers, franchi- years of transfer pricing experience and has both led and as- sors, web-based providers of goods and services, and taxpayers sisted in the design and implementation of practical and effec- in life-sciences industries. tive transfer pricing solutions to address a broad spectrum of transfer pricing issues, including management fees, license and Patrick McColgan migration of intangible property, and tangible goods transfers. Duff & Phelps LLP,Atlanta Emily also has experience assisting clients throughout the Patrick McColgan is a managing director in Duff & Phelps’ At- transfer pricing lifecycle, from planning to documentation to lanta office and part of the transfer pricing team. He has a litigation and arbitration support. strong focus on assisting growth companies with their global

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 87 Transfer Pricing Forum Country Contributors

Country Contributors Belgium

Dirk van Stappen Partner, KPMG, Antwerp/Brussels Argentina Dirk van Stappen is a partner with KPMG and leads KPMG’s transfer pricing practice in Belgium. He joined KPMG in 1988 Cristian Rosso Alba and has over 28 years of experience in advising multinational Rosso Alba, Francia & Asociados Abogados, Buenos Aires companies on corporate tax (both domestic and international) and transfer pricing issues. He leads KPMG’s transfer pricing Cristian Rosso Alba heads the tax law practice of Rosso Alba, practice in Belgium. Furthermore, Dirk is a former member of Francia & Asociados. He has a well-recognized expertise in tax the EU Joint Transfer Pricing Forum (2002–2015). law, with particular emphasis on domestic and international Since 1996, Dirk has been a visiting professor at the Univer- tax matters. Mr. Rosso Alba has served as professor of Tax Law sity of Antwerp (Faculty Applied Economics, UA) teaching Tax at the Pontifical Catholic University of Argentina; visiting pro- to Master’s students. He has been named in International Tax fessor at the University of Buenos Aires, School of Economics; Review’s ‘‘World Tax –The comprehensive guide to the world’s leading tax firms, Euromoney’s (Legal Media Group) ‘‘Guide to professor of Tax Law at Austral University; and professor of the World’s Leading Transfer Pricing Advisers,’’ and Euromon- postgraduate courses at the Torcuato Di Tella University. Addi- ey’s ‘‘Guide to the World’s Leading Tax Advisers.’’ tionally, he has been a regular lecturer in the United States and He is a certified tax adviser and member of the Belgian Insti- speaker in domestic and international tax conferences and is tute for Accountants and Tax Advisers and of the International the author of more than 80 articles appearing in specialized Fiscal Association. publications. Cristian Rosso Alba holds an LL.M. from Harvard Law School and a Certificate in International Taxation jointly Yves de Groote from Harvard Law School and the J.F. Kennedy School of Gov- Director, KPMG, Antwerp ernment at Harvard, a Masters in Taxation from Buenos Aires Yves de Groote has an LL.M from King’s College London, MSc. University School of Economics, and the degree of Abogado HUB; he joined KPMG in 2004 and has over 10 years of experi- from the University of Buenos Aires Law School. He is a ence in advising multinational organizations on transfer pric- member of the American Bar Association (ABA), the Canadian ing issues. He has been involved in and conducted various tax Tax Foundation, and the Advisory Board of the Argentine planning and transfer pricing assignments, ranging from the Chamber of Commerce. He has been recommended as one of preparation of European and global transfer pricing documen- the ‘‘Leaders in their Field’’ (Tax – Argentina) by Chambers Latin tation (including functional and economic analyses and com- America. parables searches) and domestic and international transfer pricing audit defense to the negotiation of (uni-, bi- and multi- lateral) rulings and advance pricing arrangements (APAs). Austria Romane Moniotte Tax Advisor, Global Transfer Pricing Services, KPMG, Alexandra Dolezel Antwerp Tax Director, BDO Austria GmbH, Vienna Romane Moniotte is a tax advisor in Global Transfer Pricing Alexandra Dolezel is a tax director at BDO Austria GmbH in Services at KPMG Belgium. She has a Bachelor’s degree from Vienna, Austria. She has over 22 years of experience and spe- Universite´ catholique de Louvain and a Master’s degree from cializes in international taxation and transfer pricing. Her ex- Louvain School of Management. pertise includes the conceptual design of international tax Brazil structures and business models, their defense in tax audits, liti- gation and mutual agreement procedures, as well as the optimi- zation of value chains from a transfer pricing point of view. In Jerry Levers de Abreu addition, she is a lecturer on European Union tax law and com- Partner, TozziniFreire Advogados, Sao Paulo parative tax law at FH Campus Wien, the largest university in Jerry Levers de Abreu is a Partner at TozziniFreire Advogados, Austria. Prior to joining BDO, Alexandra was a tax director at Sao Paulo. A specialist in tax law, Jerry has over 18 years of ex- PricewaterhouseCoopers, where she specialized in transfer perience in tax consulting and administrative litigation. He pricing, international tax structuring and value chain transfor- counsels both domestic and foreign clients, with an emphasis mation, and mergers and acquisitions. Prior to that, she was on indirect taxes and taxation in the automotive, information technology, telecommunications, intellectual property, food, Head of Corporate Taxes for Borealis AG, where she had over- and cosmetics sectors. Prior to building his tax practice at all responsibility for group corporate tax, including matters af- TozziniFreire, Jerry worked as a tax manager in global audit fecting tax risk management, transfer pricing, and and consulting companies. He is recognized as an Indirect Tax international structures. Alexandra received her education at Leader by the International Tax Review and recommended by the Vienna University of Economics and Business Administra- The Legal 500 and Best Lawyers. Jerry’s education includes a law tion, and she is also a member of the Austrian Chamber of Ac- degree from Universidade Sa˜o Francisco and a specialized countants. degree in Tax Law from Pontifı´cia Universidade Cato´lica de

88 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 Sa˜o Paulo. He frequently publishes articles on tax law in major France national publications. Julien Monsenego Lucas de Lima Carvalho Partner, Gowling WLG Senior Tax Associate, TozziniFreire Advogados, Sao Paulo Julien Monsenego specializes in international taxation, tax Mr. Carvalho is a tax associate with TozziniFreire Advogados, treatment of M&A, and restructurings. He assists French and Sao Paulo. In addition to his practice, he is a teacher and lec- foreign companies in their international investments as well as turer and a frequently published author. He holds an LL.M. in in the course of their tax audits and litigations. He particularly International Taxation from New York University School of focuses on Life Science and R&D-intensive industries. He has Law, an LL.M. in Corporate Law from Instituto Brasileiro de extended the practice of transfer pricing and has intervened for Mercado de Capitais (IBMEC), an International Executive French and non-French groups in setting up intragroup flows, MBA from the Chinese University of Hong Kong, an MBA in IP companies, and business restructuring. Before joining Taxation from Fundacao Getuı`lio Vargas (FGV), and an LL.B. Gowling WLG, Julien worked at Arthur Andersen Interna- (magna cum laude) from Federal University of Cearaı`. tional, Ernst & Young, Coudert Brothers, and Dechert LLP. He is a member of the Paris Bar. Mateus Tiagor Campos Tax Associate, TozziniFreire Advogados, Sao Paulo Thibaud Boucharlat Senior Associate, Gowling WLG Mateus Tiagor Campos is a Junior Associate at TozziniFreire Advogados, Sao Paulo. Thibaud Boucharlat is a senior associate in the Paris tax de- partment. He has built up a wide range of experience in advis- ing French and foreign clients on a variety of transactions, Canada including disposals, acquisitions, restructuring, financing and refinancing, reporting, and risk management. Thibaud advises Richard Garland different kinds of clients with different needs and does every- Partner, Deloitte LLP,Toronto thing he can to satisfy them, which can involve working closely with other teams in the firm. Richard Garland is a partner in the Toronto office of Deloitte. He is a Chartered Professional Accountant and has over 25 Guillaume Madelpuech years of accounting experience focused in the area of corporate NERA Economic Consulting, Paris international taxation. Richard has assisted clients in all as- pects of international taxation, with particular emphasis on tax Guillaume Madelpuech is a Principal within the Paris Transfer treaty issues, cross-border financing structures, and transfer Pricing Practice. He is an economist specializing in transfer pricing. Over the past several years, Richard’s work has been fo- pricing, economic modeling, and intercompany valuation. For cused in the area of transfer pricing, and he has been repeatedly a number of years, he has advised multinational enterprises been recognized in Euromoney’s guide to leading transfer pric- with regard to their transfer pricing policy design, documenta- ing practitioners. tion, and defense, particularly in projects related to business re- structuring, intangible-related transactions, and intellectual property migration. He has conducted a number of transfer Inna Golodniuk pricing projects for multinationals in a wide range of indus- Deloitte LLP,Toronto tries. Prior to joining NERA, Mr. Madelpuech was an economist Inna Golodniuk is a member of the transfer pricing team at De- with EY transfer pricing and valuation groups for eight years, loitte LLP in Toronto, Canada. working in both the Paris and New York City offices. He was praised by the French publication De´cideurs as one of the lead Denmark economists for the EY Paris team in 2011 and 2014. Mr. Mad- elpuech is a frequent contributor to the OECD policymaking re- lated to the Base Erosion and Profit Shifting (BEPS) Action Arne Møllin Ottosen Plan and has been invited to represent NERA at OECD public Partner and Head of Tax Law, Kromann Reumert, consultations. He has been a lecturer on transfer pricing at the Copenhagen University of Vienna and at ESCP Europe. Mr. Madelpuech also Arne Møllin Ottosen is the Head of Kromann Reumert’s tax law frequently contributes to journals and trade publications. group. He specializes in contentious tax, including transfer pricing, tax litigation, and business taxation advisory work. Germany Arne is the author of numerous Danish and international ar- ticles on tax and company law. Arne is listed in the International Alexander Voegele Tax Review, European Legal 500, and Chambers. He holds a law NERA Economic Consulting, Frankfurt degree from Aarhus University (cand.jur. 1993) and an LL.M. from King’s College, University of London (1999). For more than 25 years, Dr. Alexander Voegele has been advis- ing international corporations and leading law firms on trans- fer pricing issues, specializing in the development of innovative Casper Jensen economic structures for transfer pricing strategies and for the Attorney, Kromann Reumert, Copenhagen defense of major international transfer pricing cases. He has Casper Jensen is an attorney and a member Kromann Re- led hundreds of large transfer pricing projects and defense umert’s tax law group. He specializes in corporate and interna- cases for a variety of clients in a range of industries. Prior to tional tax matters. Casper is the author of numerous articles on joining NERA, Alexander was a partner with PriceWaterhouse international taxation. He holds a law degree from the Univer- and KPMG, where he was in charge of their German transfer sity of Copenhagen (cand.jur. 2013). pricing practice. He holds a doctorate in Economics and a Mas-

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 89 ters of Tax and Business Administration from the University of India Mannheim. He is a certified German auditor and tax adviser and is a French Commissaire aux Comptes. He has received nu- Rahul Mitra merous awards as a transfer pricing adviser and has frequently Partner, Dhruva Advisors LLP,India been ranked as a leading tax and transfer pricing professional. Rahul K. Mitra is currently a partner at Dhruva Advisors LLP, India. Prior to joining Dhruva Advisors, Rahul was the National Philip de Homont Head of Transfer Pricing & BEPS for KPMG in India and the NERA Economic Consulting, Frankfurt national leader of PwC India’s transfer pricing practice between 2010 and 2014. Rahul was a partner in the tax and regulatory Philip de Homont is an expert in NERA’s global Transfer Pric- services practice of PwC India between April 1999 and Febru- ing practice, where he provides transfer pricing advice to inter- ary 2015. Rahul has over 22 years of experience in handling national corporations and law firms. He specializes in the taxation and regulatory matters in India. He specializes in transfer pricing of intellectual property in tax audits and litiga- transfer pricing, particularly inbound and outbound planning tion cases, as well as in the digital economy. His recent projects assignments and advises on profit/cash repatriation planning, have focused on DEMPE analysis and relocations of functions value chain transformation or supply chain management proj- (Funktionsverlagerung), and he has extensive experience in the ects, profit attribution to permanent establishments, and defense of licensing and valuation arrangements for intan- others. Rahul independently handles litigation for top compa- gibles. Philip is a frequent speaker at international tax confer- nies before the Income Tax Tribunals. At least 50 of the cases ences and regularly publishes articles on transfer pricing independently argued by Rahul have been reported in leading developments and on defense and planning cases. He authored tax journals of India. Some of Rahul’s major wins before the two chapters on valuation for leading German textbooks on Tax Tribunals in transfer pricing matters have set precedents, Transfer Pricing and Intellectual Property. He has repeatedly both in India and globally. been listed as a ‘‘Rising Star’’ in transfer pricing by Euromoney’s In his personal capacity, Rahul has handled several APAs in Expert Guides. India, involving clients from across industries and also cover- ing complex transactions, e.g., industrial franchise fees/ Georg Dettmann variable royalties under non-integrated principal structures; NERA Economic Consulting, Frankfurt contract R&D service provider model; distribution models, with related marketing intangible issues; financial transac- Dr. Georg Dettman is a manager at NERA Economic Consult- tions; and profit split models for royalties. He has been consis- ing in Frankfurt, Germany. His specialties include valuation tently rated as one of the leading transfer pricing professionals (companies, IP, financial products, FX, etc.), transfer pricing, and tax litigators in the world by Euromoney and International and economic simulations/modeling (incentivisation schemes, Tax Review since 2010. bargaining situations, structures). With a Ph.D. in Economics Rahul has been a visiting member of the faculty of the Na- and Finance, he is the author of several published articles. tional Law School in the subject of transfer pricing and interna- tional tax treaties and the country reporter on the topic ‘‘Non Hong Kong Discrimination in international tax matters’’ for the IFA Con- gress held in Brussels in 2008. He was invited by the OECD to speak in the 2012 Paris roundtable conference on developing Jeffrey Wong countries’ perspective on APAs. Senior Manager, KPMG Global Transfer Pricing Services, Hong Kong Aditya Hans Partner, Dhruva Advisors LLP,India Jeffrey Wong has over nine years of experience in assisting mul- tinational corporations with managing their transfer pricing Aditya Hans is a Fellow Member of the Institute of Chartered issues. He is an experienced financial services transfer pricing Accountants of India. He was formerly a Partner with KPMG advisor and works with clients from the banking, insurance, and, in his 14-year tax consulting career, has worked with Big 4 and asset management sectors. Jeffrey joined KPMG in Hong firms PwC & EY. His focus area has been International Taxa- Kong in 2014 and has been based in Hong Kong for over seven tion, including Transfer Pricing (TP audit defense and litiga- years. He also worked as a transfer pricing specialist in New tion, APA, MAP, Global TP Documentation, Value Chain York for over two years. He holds a Bachelor of Science in Fi- Assessment, Value Chain Structuring, and BEPS), PE attribu- nance and International Business (Magna Cum Laude) from tion, Inbound & Outbound entry/exit & profit/cash repatriation the NYU Stern School of Business. strategies. He has worked on several complex transactions in Transfer Pricing, including Industrial Franchise Arrangements, Principal Structures, Marketing Intangibles, CAPM-based pric- Irene Lee ing models, Financial Transactions Transfer Pricing, and a va- Director, KPMG Global Transfer Pricing Services, Hong Kong riety of IP arrangements. He has served clients in the Metal & Mining, Automobile, Engineering, Pharma, and FMCG sectors. Irene Lee has practiced tax for 11 years, the last 7 specializing He is also a frequent speaker at technical forums on taxation in transfer pricing matters involving the financial services and regularly contributes articles to Indian and International sector. She joined KPMG in Hong Kong in 2013 and advises Tax Journals. banking, asset management, and insurance clients on transfer pricing policies, documentation, and risk management in the Ashish Jain Asia region. She earned a Bachelor’s of Business Administra- Senior Associate, Dhruva Advisors LLP,India tion (B.B.A.) degree from the Chinese University of Hong Kong and has studied at the University of North Carolina (Chapel Ashish Jain is a senior associate at Dhruva Advisors LLP, India Hill). and a member of the Institute of Chartered Accountants of

90 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 India. He has over seven years of experience in transfer pricing, a co-author on the Ireland section of the Bloomberg BNA assisting clients in their compliance documentation, litigation Transfer Pricing Forum and a co-author of the Ireland chapter support, and business restructuring for inbound and outbound of the International Fiscal Association Cahiers on Cross Border assignments. He has hands-on work experience on interna- Business Restructuring. tional transfer pricing planning projects and has assisted in framing several transactions and specific tax advice for India’s Catherine is a Chartered Tax Advisor and a member of the largest homegrown automobile company, steel manufacturer, Law Society of Ireland. chemicals manufacturer, and company dealing in IT/ITeS. He has also assisted in filing an Advance Pricing Agreement appli- Israel cation for certainty in transfer pricing policy and audit scru- tiny. He has undertaken extensive research on arm’s length pricing for transactions involving intercompany financing, in- Yariv Ben-Dov cluding loans, preference shares, and guarantees. He has also Head of Transfer Pricing at Lion Orlitzky & Co. – Moore undertaken research in the area of intragroup services and its Stephens Israel interplay with arm’s length pricing. Currently, he is assisting Yariv Ben-Dov is Head of Transfer Pricing at Lion Orlitzky & clients with value creation assessment and value chain struc- Co. – Moore Stephens Israel. Prior to that, he was Head of turing. Transfer Pricing and Valuations Department at Herzog, Fox & Neeman. He is an expert in drafting and defending transfer Sourav Toshniwal pricing studies and intercompany agreements, with over 15 Senior Associate, Dhruva Advisors LLP,India years of experience. Yariv counsels both multinational con- Sourav Toshniwal is a transfer pricing professional with more glomerates and small start-ups on their transfer pricing mat- than nine years of experience. He has worked with PwC and De- ters, including multinationals which have no activity in Israel. loitte in the past, assisting clients in their compliance docu- Before working at HFN, Yariv was a co-founder of Bar-Zvi & mentation and advisory related transactions in the financial Ben-Dov, a boutique law firm specializing in transfer pricing services industry. His focus area has been advising clients in and high-tech and, before that, Yariv served as the Head of the setting up an arm’s length price for financial transactions, such Transfer Pricing Unit at Teva Pharmaceuticals. Yariv has pub- as intercompany loans, guarantees, and cash pools. He has also lished articles on the subject of transfer pricing and has been assisted in filling an Advance Pricing Agreement application, as asked to keynote as an expert in transfer pricing at several con- well as discussions with tax authorities for transactions involv- ventions in Israel, Europe, and the U.S. Yariv is a member of ing a guarantee and compulsorily convertible debentures. Transfer Pricing Associates, the world’s largest network of inde- Sourav has a Master’s degree in Economics from Indira Gandhi pendent transfer pricing experts; the Israeli Bar Tax Commit- Institute of Development Research, Mumbai and has also com- tee; and the Board of the Israeli-LATAM Chamber of pleted a B.Sc. in Economics from St. Xavier’s College, Kolkata. Commerce. Yariv is also a Board member of the Arthur Rubin- stein Music Society and the head of the Society’s NYC branch. Meera Kohli Yariv provides counsel (pro bono) to the Israeli Navy Associa- Consultant, Dhruva Advisors LLP,India tion. Yariv speaks Hebrew, English, French, and Italian and has Meera Kohli is an MBA (Finance) and Graduate in Commerce. often advised global clients in their local language. Meera is a transfer pricing professional with seven years of ex- perience with two of the largest global professional services Italy firms. Prior to joining Dhruva Advisors LLP as a consultant, Meera served as a manager at PwC. Meera has managed a di- verse client portfolio spanning across various industries, such Marco Valdonio as media and entertainment, alcoholic beverages, fast moving Partner, Maisto e Associati, Milan consumer goods, automobiles, information technology (IT), Marco Valdonio was admitted to the Association of Chartered and IT-enabled services. Meera has been responsible for assist- ing clients with advance pricing agreements (unilateral and bi- Accountants in 2002. He joined Maisto e Associati in 2000 after lateral), transfer pricing documentation, litigation, and working for another tax law firm. He headed the London office advisory projects. from 2002 to 2004 and has been a partner in the firm since 2011. Marco’s areas of expertise include transfer pricing, tax controversies and settlements, mergers and acquisitions, finan- Ireland cial instruments, and international taxation.

Catherine O’Meara Partner, Matheson, Dublin Aurelio Massimiano Partner, Maisto e Associati, Milan Catherine O’Meara is a partner in the tax department at Mathe- son. Catherine has over ten years’ experience advising multina- Aurelio Massimiano is a partner at Maisto e Associati, where he tional corporations doing business in Ireland on Irish has practiced since 2005, after having worked for the Interna- corporate tax. Catherine has a particular interest in transfer tional Tax Office of the Italian Revenue Agency and, prior to pricing, competent authority matters, and business restructur- that, for a Big 4 accounting firm. His areas of expertise are in- ings and also has extensive experience in structuring inward in- ternational taxation and transfer pricing. He is the permanent vestment projects, mergers and acquisitions, and corporate assistant of Professor Guglielmo Maisto at the EU Joint Trans- reorganizations. Catherine’s clients include many of the leading fer Pricing Forum. A member of the Association of Chartered multinational corporations established in Ireland, primarily in Accountants, he holds degrees from Luiss Guido Carli Univer- the pharmaceutical, healthcare, ICT, and consumer brand sec- sity in Rome and an LL.M. in International Tax Law from the tors. Catherine has published articles in leading tax journals, is University of Leiden in the Netherlands.

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 91 Mirko Severi over 40 specialists, including ex-KNTS officers and economists Associate, Maisto e Associati, Milan with global backgrounds. Mirko Severi joined Maisto e Associati in 2011 after obtaining Luxembourg a Master Diploma in Tax Law at IPSOA. He graduated (cum laude) in Economics from the University of Parma in 2010. His areas of expertise include corporate taxation and group taxa- Peter Moons tion. Tax Partner and Head of the Transfer Pricing Team, Loyens & Loeff, Luxembourg Japan Peter Moons is a partner in the tax practice of Loyens & Loeff Luxembourg since 2004, with a focus on corporate tax advice Takuma Mimura for multinationals and funds and, in particular, private equity Managing Director, Cosmos International Management Co., funds, their initiators, and their investors. Before joining the Ltd, Nagoya Luxembourg office in 2004, he practiced in the Rotterdam and Frankfurt offices of Loyens & Loeff, specializing in real estate Takuma Mimura is the managing director of Cosmos Interna- funds and cross-border tax structuring. Peter is also active in tional Management, a transfer pricing boutique consulting firm the Loyens & Loeff German and Eastern European desks and in Japan. He has more than 14 years of transfer pricing experi- heads the Luxembourg transfer pricing team. Peter is a ence, including 6 years at Deloitte Touche Tohmatsu (both member of the Luxembourg Bar, the International Fiscal Asso- Tokyo and New York) and international banking experience ciation (IFA), and the tax committee of the Luxembourg Private prior to transfer pricing. He has worked extensively on transfer Equity and Venture Capital Association. Peter is the author of pricing issues worldwide and is especially experienced in the Tax Management Portfolio, Business Operations in Luxem- Japan, U.S., and China TP matters. He has also worked with a bourg, published by Bloomberg Tax. He received a Business broad range of clients in manufacturing, financial services, and economics and tax law degree from Erasmus University in Rot- telecommunications and has assisted many taxpayers in nego- terdam in 1996 and a Tax law degree from University of Co- tiations with the Japanese tax authorities on transfer pricing logne in 1997. audit examinations. Takuma has authored articles for profes- sional journals, including BNA’s Transfer Pricing Report and Gaspar Lopes Dias Monthly International Taxation of Japan, and is a frequent Tax Advisor and Transfer Pricing Specialist, Loyens & Loeff, speaker on transfer pricing topics. Luxembourg Gaspar Lopes Dias is an associate in the tax practice group of Korea Loyens & Loeff Luxembourg. He specializes in international taxation and transfer pricing, Gaspar advises on financial Dr. Tae Hyung Kim transactions (e.g., cash pool, debt pricing) and intragroup ser- Transfer Pricing, Korea vices. Prior to joining Loyens & Loeff Luxembourg, Gaspar Dr. Tae-Hyung Kim is a former senior partner and national worked at a big 4 company in Belgium, having gained experi- leader of the Global Transfer Pricing Group at Deloitte, Korea. ence in several industries and in a broad range of transfer pric- Over more than 14 years, Dr. Kim has represented multina- ing matters, including TP documentation, IP structuring and tional corporations in various industries in transfer pricing arm’s length license fees, relocation of functions, MAP/EU Arbi- audit defense, advance pricing agreement negotiations, mutual tration Convention, and EU State Aid rules on transfer pricing. agreement procedures, and planning and documentation stud- He received a degree in Advanced Transfer Pricing from ITC ies. Prior to his previous position, Dr. Kim headed the national Leiden, an Advanced LL.M. in European and International transfer pricing practice at other Big Four firms in Korea and Taxation from Tilburg University, and a law degree from Nova the Law and Economics Consulting Group in Korea. Before University of Lisbon. specializing in transfer pricing, Dr. Kim was a research fellow for the Korea Institute for International Economic Policy Fernanda Rubim (KIEP). During his tenure at the KIEP, he advised the Ministry Tax Advisor and Transfer Pricing Specialist, Loyens & Loeff, of Finance and Economy; the Ministry of Commerce, Industry, Luxembourg and Energy; and the Ministry of Foreign Affairs in the area of Fernanda Rubim is an associate in the International Tax De- international trade and investment policies. partment of Loyens & Loeff Luxembourg. She specializes in In- Dr. Kim’s recent publications appear in IBFD’s International ternational Tax Law and Transfer Pricing. Before joining Transfer Pricing Journal, BNA Tax Management’s Transfer Pric- Loyens & Loeff, Fernanda acquired six years of experience in ing Reports, and Euromoney’s Transfer Pricing Reviews. His eco- International Tax Law and Transfer Pricing in the Industry. She nomics publications also appear in Canadian Journal of received her LLM from the University of Leiden. Economics and Review of International Economics. He holds a Ph.D. in economics from the University of Washington and is a Mexico graduate of Advanced Management Programs from both Har- vard Business School and Seoul National University. Moises Curiel Garcia Transfer Pricing Partner, Baker & McKenzie, Mexico City Seong Kwon Song Moises Curiel heads Baker & McKenzie’s Latin America Trans- Transfer Pricing, Deloitte Korea fer Pricing and Valuation practice in Mexico. He has more than Mr. Seong Kwon Song, former Assistant Commissioner for In- 23 years of experience in transfer pricing and international ternational Tax Investigation and Head of the Competent Au- taxes and, currently, among other aspects of his practice, tax thority at the Korean National Tax Services (KNTS), leads the counsel for the maquiladora industry and the Employers’ Con- Deloitte transfer pricing group in Seoul, Korea. The group has federation of the Mexican Republic. He is recognized by Inter-

92 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 national Tax Review as one of Mexico’s top tax advisers. Mr. Krzysztof has spoken at various seminars and conferences, in- Curiel has previously served as the transfer pricing audits and cluding Ernst & Young’s Annual Transfer Pricing Symposiums resolutions administrator of Mexico’s Ministry of Finance and in Amsterdam and Moody’s Analytics RiskCalc User Group Public Credit for almost eight years. He helped prepare and Meeting in Frankfurt. implement various transfer pricing rules in Mexico, including the Income Tax Law, the Temporary Tax Ruling and the Federal Tax Olga Shambaleva Code. He also led the country’s Advance Pricing Agreements Senior Manager in Transfer Pricing & Operating Model Program and conducted the first transfer pricing audits in Effectiveness Group, Ernst & Young Belastingadviseurs LLP, Mexico and Latin America. He has represented Mexico before Amsterdam the OECD for the transfer pricing party (WP6). Mr. Curiel’s edu- Olga Shambaleva, a senior manager based in Amsterdam, has cational certifications include degrees in public accounting from more than 11 years of experience in participating and manag- the Universidad ISEC in Mexico City and in taxation from the Uni- ing transfer pricing planning, business modeling and valuation, versidad Panamericana, as well as certifications from Anahuac and value chain transformation projects among various juris- University (International Expert Transfer Pricing) and Instituto dictions, including Russia and the broader CIS region, the Mexicano de Contadores Publicos de Mexico, A.C. (Tax Special- Netherlands, and the UK. Olga has a multidisciplinary skill set, ization Certificate). combining in-depth transfer pricing and value chain transfor- mation knowledge with fundamental economic insights, in- Allan Pasalagua cluding corporate finance and international economics. Olga is Tax Counsel, Baker & McKenzie, Mexico City an active contributor to international magazines and research Allan Pasalagua advises on transfer pricing, with an emphasis groups in the fields of corporate taxation, finance, and transfer on economic analysis. He has considerable experience in mat- pricing. ters involving planning, compliance, valuations, and audits in She started specializing in international tax and transfer Mexico. With over a decade of experience as an economist, pricing in 2007 while obtaining her bachelor’s and master’s de- Allan worked for over two years at Baker & McKenzie’s New grees in Economics and Financial management from the Rus- York office, where he was involved in a large number of compli- sian Plekhanov University of Economics. ance and planning projects. He counsels companies from dif- ferent industrial sectors on local transfer pricing matters but Martin Druga has also been involved in global and regional documentation Senior Consultant in Transfer Pricing & Operating Model projects. In particular, he advises on compliance with formal Effectiveness Group, Ernst & Young Belastingadviseurs LLP, obligations, along with which best practices to establish trans- Amsterdam fer pricing policies, Advance Pricing Agreement procedures, and on the technical aspects on transfer pricing disputes. In ad- Martin Druga is a senior consultant in the Transfer Pricing & dition, Allan’s practice includes business and intangible assets Operating Model Effectiveness Group of EY Amsterdam, cur- valuations. He has a degree in Economics from Universidad rently specializing in the area of Financial Transactions Trans- Iberoamericana. fer Pricing. Martin has been specializing in tax and transfer pricing services since 2013. He has been involved in multiple Rafael de la Mora projects for large multinationals from various sectors, includ- Transfer Pricing Junior Associate, Baker & McKenzie, ing designing transfer pricing structures, negotiating advance Mexico City pricing agreements with tax authorities, transfer pricing con- troversy and dispute resolution, benchmarking, and documen- Rafael de la Mora is a junior associate on the transfer pricing tation. As part of his previous role at EY Slovakia, Martin also team in Baker & McKenzie’s Mexico City office. actively participated as an external expert consultant for Slovak legislators enforcing regulatory changes in the Slovak tax and The Netherlands transfer pricing environment. Martin has a Bachelor’s degree in Business and Commerce Krzysztof ukosz and a Master’s degree in Business and Commerce from the Uni- Associate Partner in Transfer Pricing & Operating Model versity of Economics in Bratislava (Slovakia). Effectiveness Group, Ernst & Young Belastingadviseurs LLP, Amsterdam Etan Wijnberg Consultant in Transfer Pricing & Operating Model Krzysztof 0ukosz, an associate partner based in Amsterdam, is Effectiveness Group, Ernst & Young Belastingadviseurs a key member of the Global EY Treasury and Finance TP net- LLP,Amsterdam work. He has been specializing in transfer pricing services since 2007, with the main area of his expertise revolving around Etan Wijnberg is a consultant in the Transfer Pricing & Operat- financial transactions and treasury operations. He has con- ing Model Effectiveness Group of EY Netherlands, specializing sulted on multiple projects for large multinationals, including, in the area of Financial Transactions Transfer Pricing. He has among others, advance pricing agreements with tax authori- an academic background in both finance and tax law and has ties, TP controversy and dispute resolution, designing intra- consulted on multiple projects for large multinationals, includ- group financing structures and TP frameworks for treasury ing, among others, advance pricing agreements with tax au- centers, TP planning, M&As, benchmarking, and documenta- thorities, TP controversy and dispute resolution, TP planning, tion. Krzysztof has spoken at various internal and external benchmarking, and documentation of both financial and non- seminars and conferences. He is also a contributor to interna- financial intercompany transactions. He is furthermore in- tional journals in the field of transfer pricing. volved in multiple RPA, data analytics, and data visualization Krzysztof holds a master’s degree in Mathematics from the projects. VU University Amsterdam and a master’s degree in Financial Etan has a Bachelor of Science (B.Sc.) in Economics and Mathematics from the Jagiellonian University in Cracow. Business, a Master of Science (MSc) in Business Economics:

10/18 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 93 Finance, and a Master of Laws (LL.M.) in Tax Law/Taxation Russia from the University of Amsterdam (The Netherlands). Evgenia Veter New Zealand Partner, Ernst & Young, Moscow Evgenia Veter joined the Transfer Pricing Group of Ernst & Leslie Prescott-Haar Young as a partner in March 2011, coming from another major Managing director, TP EQuilibrium | AustralAsia LP accounting firm. She has extensive experience in providing ad- (‘‘TPEQ’’) visory services to Russian and international companies on vari- Leslie Prescott-Haar is the managing director of TP EQuilib- ous areas of taxation and conducting business in Russia, rium | AustralAsia LP (’’TPEQ’’) (formerly, Ceteris New Zea- structuring investments, and coordinating approaches to tax land). TPEQ provides transfer pricing services in Australia and planning. Since 2007 Evgenia has been focusing on transfer New Zealand across an extensive range of industries, transac- pricing. She has led transfer pricing planning and documenta- tions, and engagements, including APAs; independent second tion projects for multinational and Russian clients in various opinions and expert advice; tax authority reviews, investiga- industry sectors, including structuring of entry/exit strategies tions, and audit defense; global, regional, and country-specific of clients from the transfer pricing perspective, adaptation of documentation. Leslie has over 22 years of specialized transfer global transfer pricing policies to Russian requirements, busi- pricing experience based in the APac Region (Sydney and ness restructuring, development of sustainable transfer pricing Auckland) and an additional 10 years of corporate taxation ex- methodologies, etc. Evgenia specializes in serving companies perience in Big 4 accounting firm practices, specializing in working in retail, consumer products and life science indus- mergers, acquisitions, bankruptcies, and reorganizations based tries. in the United States (New York City and Chicago). Prior to forming TPEQ, Leslie commenced the transfer pricing practice Stepan Kalyuzhnyy of Ernst & Young New Zealand, where she served as the Na- Senior Manager, Ernst & Young, Moscow tional Leader for a number of years. Leslie frequently provides Stepan Kalyuzhnyy joined the Financial Services Transfer Pric- ‘‘thought leadership’’ contributions to various international ing Group of Ernst & Young Russia as a senior manager in publications and associations. August 2018 after working at another major accounting firm in the Financial Services Tax Group since 2006. Stepan has exten- Sophie Day sive experience in consulting Russian and multinational groups Analyst, TPEQ on direct and indirect corporate taxation matters, including Sophie Day is an Analyst at TPEQ. She has several years of business tax structuring, risk detection and mitigation, tax due transfer pricing experience since joining TPEQ in July 2015, diligence, permanent establishment, and tax residency matters. working across various industries and projects for TPEQ’s Stepan specializes in providing transfer pricing services to fi- client base. Sophie completed her tertiary studies in 2016 and nancial sector companies, including international investment has since worked for the firm in a full-time capacity. and corporate banking groups, investment management groups, and other industry participants. He also provides con- Portugal sulting to non-financial sector companies on tax and transfer pricing issues associated with financial transactions. Patricia Matos Associate Partner at Deloitte & Associados SROC, Yuriy Mikhailov S.A.,Lisbon Senior Manager, Ernst & Young, Moscow Patrı´cia Matos is currently an Associate Partner in Deloitte’s Yuriy Mikhailov joined the Transfer Pricing Group of Ernst & Lisbon office in the transfer pricing department. Young Russia in 2008 and has been mainly specializing in pro- Patrı´cia has a business degree and is a chartered accountant. viding transfer pricing services to the financial services sector, She started her professional career in Arthur Andersen (Arthur including investment and corporate banks, asset managers, in- Andersen, S.A., presently Deloitte & Touche, as result of an ef- surers, and reinsurers. Yuriy also provides corporate treasury fective association of both firms since April 2002) in 1997 and transfer pricing services to the non-financial sector. On the EY was promoted to Associate Partner in 2008. Russia financial services transfer pricing team, Yuriy advises Patrı´cia has extensive experience in tax planning, due dili- clients on BEPS and global transfer pricing policies, global and gence, and tax compliance for Portuguese and multinational local documentation, automatization of transfer pricing, big companies. In 2002, she began working exclusively in transfer data analyses, cost allocations, fund transfer pricing, and man- pricing. She advises clients in several aspects of transfer pric- agement of permanent establishment tax risks. ing, ranging from tax audits to comprehensive transfer pricing United Kingdom planning, structuring of intercompany transactions, and defen- sive documentation. Her experience spans a wide range of industries, including Murray Clayson communications, technology, media, financial services, auto- Editorial Board Member and Panelist for United Kingdom motive, consumer goods, tourism, and pharmaceuticals. Tax Partner, Freshfields Bruckhaus Deringer, London Patrı´cia has been a speaker at several seminars and confer- Murray Clayson is a partner in Freshfields’ tax practice group ences on tax, economic, and transfer pricing issues. and is based in London, and leads the firm’s international trans- fer pricing practice. He specializes in international tax, finance Sofia Margarida Jorge and capital markets taxation, corporate structuring, transfer Manager, Deloitte & Associados SROC, S.A., Lisbon pricing, banking and securities tax, asset and project finance, Sofia Jorge is currently a manager at Deloitte & Associados derivatives and financial products, particularly cross-border. SROC, S.A., Lisbon. Murray is listed in Chambers Europe, Chambers UK, The Legal

94 10/18 Copyright ஽ 2018 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 500 UK, Who’s Who Legal, PLC Which Lawyer? Yearbook, Tax Di- tangible property valuation, and transfer pricing policy devel- rectors Handbook, Legal Experts and International Tax Review’s opment. Michelle is a member of Duff & Phelps’ financial World Tax. He is a fellow of the Chartered Institute of Taxation, services team and has significant experience assisting compa- past-Chairman of the British branch of the International Fiscal nies with pricing matters involving asset management, insur- Association and a member of the CBI’s Taxation Committee and ance, banking, and global dealing transactions. Michelle is also International Direct Taxes Working Group. Murray is a graduate a frequent speaker on intercompany services transactions and of Sidney Sussex College, Cambridge, and holds a PhD from the has performed dozens of analyses in this area. In addition to University of London for research in the field of transfer pricing. preparing documentation, restructuring, and planning assis- He joined the firm in 1983 and has been a partner since 1993. tance for companies ranging from start-ups to Fortune 100 firms, Michelle has been called upon as a transfer pricing Cora Hardy expert in numerous audit defense matters. She obtained her Trainee Solicitor, Freshfields Bruckhaus Deringer, London Master’s degree in Economics from New York University and a Cora Hardy is a Trainee Solicitor at Freshfields Bruckhaus De- B.S. in Economics and French, with a minor in Mathematics, ringer LLP. from the University of Illinois (magna cum laude).

Andrew Cousins Stefanie Perrella Director, Duff & Phelps, London Managing Director in Transfer Pricing, Duff & Phelps LLP, New York Andrew Cousins is an international tax practitioner in the Duff & Phelps Transfer Pricing practice, with more than 20 years of Stefanie Perrella is a managing director at Duff & Phelps. As a cross-border experience in private practice, industry and in leader in Duff & Phelps’ New York transfer pricing practice, government. He brings a comprehensive regulatory, commer- Stefanie provides global transfer pricing advice to organiza- cial and advisory perspective to the fields of transfer pricing tions that range from Fortune 500 companies to start-up busi- and business restructuring, with a focus on practical imple- nesses. Specifically, she has nearly 10 years of experience mentation. Before joining Duff & Phelps Andrew was Deputy assisting these clients with all aspects of transfer pricing from Comptroller of Taxes in the Jersey tax authority, acting as com- planning, documentation, and implementation to audit sup- petent authority for all of Jersey’s international tax agreements. port and controversy. Stefanie is also a thought leader on Duff He also served as Jersey’s delegate to the Global Forum on & Phelps’ Financial Services Transfer Pricing team, spending a Transparency and Exchange of Information for Tax Purposes, significant amount of time focused on transfer pricing strategy as well as representing Jersey at the OECD’s Global Forums for for financial services clients, as well as establishing best prac- Transfer Pricing and for Tax Treaties. Andrew spent eight years tices for assessing intercompany debt and other intercompany in industry as a global head of transfer pricing, and has led the financing arrangements for the firm’s top clients across a wide transfer pricing practice in two FTSE 100 FMCG multination- spectrum of industries. Stefanie also has significant experience als. providing transfer pricing valuation services associated with Andrew is a graduate of Oxford University and is a fellow of cost sharing arrangements and intangible transfers to clients the Institute of Chartered Accountants in England and Wales. primarily in the pharmaceutical and medical device space. Ste- He qualified as a chartered accountant at Deloitte before focus- fanie received a B.S. (summa cum laude) in International Af- ing on transfer pricing at Ernst & Young, where he was a fairs, with a concentration in Finance, and an M.A. in member of its Tax Effective Supply Chain Management team. International Economic Relations from American University.

United States Michael Berbari Vice President in Transfer Pricing, Duff & Phelps LLP,New Michelle Johnson York Managing Director in Transfer Pricing, Duff & Phelps LLP, Michael Berbari joined Duff & Phelps in September 2013. Chicago Michelle Johnson has been practicing transfer pricing for over Zachary Held 15 years. A managing director, Michelle has significant experi- Vice President in Transfer Pricing, Duff & Phelps LLP,New ence advising clients on transfer pricing and valuation matters, York including global transfer pricing documentation preparation, Zachary Held joined Duff & Phelps in July 2014. ASC 740 (FIN 48) recognition and measurement analyses, in-

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