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. THE TRANSFER PRICING FORUM is published quarterly by Bloomberg BNA, 1801 South Bell Street, Arlington, VA 22202-4501. Editorial inquiries may be directed to the managing editor at +1 (703) 341-5948. For customer service, call +1 (800) 372-1033 in the U.S. Outside of the U.S. call BBNA in London at (+44) 20 7487 5858. ௠ Copyright 2018 Bureau of National Affairs Inc., Arlington,VA. 22202. Authorization to photocopy selected pages for internal or personal use is granted provided that appropriate fees are paid to Copyright Clearance Center (978) 750-8400, http://www.copyright.com. For authorization of other uses, contact the TM Reprint Permission Coordinator at (703) 341-5937,or send a written request via fax (703) 341-1624, or e-mail [email protected]. For more information, see http://www.bna.com/corp/copyright. Permission to reproduce Bloomberg BNA material may be requested by calling Tax Management at +1 (703) 341-3000. www.bna.com 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