Navigating transfer pricing risk exposure on financial arrangements and supporting intra-group cash mobilization during the COVID-19 crisis.
Intra-group financing transactions such as loans, cash pools, guarantees, etc. are increasingly becoming a focus area of tax authorities and a source of tax disputes in Denmark and abroad. The number of TP reviews and disputes is expected to increase following OECD in February 2019, for the first time, published ground-breaking guidance on the transfer pricing treatment of intra-group financial transactions.
Following the Global outbreak of COVID-19 many companies struggle with liquidity and therefore exploit intra-group financial arrangements to support needed cash mobilization and cash prioritization. This can, if not done with proper diligence, be a source of significant tax risk exposure.
EY offers advisory in navigating and mitigating tax risk exposures relating to intra-group financial arrangements and can advise on managing intra-group cash mobilization and financial guarantees.
New OECD Guidance on intra-group financial arrangements - Key take-aways
The new guidance from OECD published on 11 February 2020 represents the first time guidance on financial transactions is included in the OECD Transfer Pricing Guidelines. The new guidance covers transactions such as loans, cash pools, guarantees, etc. and may represent a source of risk for existing intra-group financial arrangements.
Transactions must be priced based on accurate delineation of the comparability factors impacting the price, such as credit rating, currency, maturity, payment rank, issue date, payment terms etc. Further, multinational companies (MNEs) should also be mindful of e.g.:
- Does intercompany financing qualify as loans or is there a risk that financing can it be characterized as equity?
- Does lenders have capacity for the debt?
- Are arrangements rational from a lender’s and borrower’s perspective?
- Can credit rating and interests reasonably be expected to sustain a TP audit under new guidance?
- Are benefits relating to interest synergies derived from cash pools reasonably allocated between participants?
- Does pricing of financing arrangements reasonably account for group affiliation (implicit support)
- Is the remuneration of the treasury function in line with the arm’s length principle?
TP treasury impact under the global COVID-19 crisis in conjunction with new guidance
The COVID-19 crisis presents a significant disruption for MNEs and it is clear that it will materially impact on MNEs across the world. Many MNEs will experience drastic drops in revenues.
Cash flows and liquidity of most MNEs are already impacted by effects of COVID-19 and for many this constitutes a real threat to business.
From a TP perspective, a derived impact from the COVID-19 crisis is significant pressure on MNEs treasury function, amongst other through dealing with volatile capital markets, managing external financing and in managing MNEs cash flows and liquidity across entities and jurisdictions.
Treasure functions in MNEs will have to navigate financial hardship for the Group while protecting group entities from defaulting on external and/or internal financial obligations. In this relation the current crisis has the potential for significantly impact intra-group financial arrangements in many MNEs, e.g. through changed credit ratings, early or postponed intercompany payments, loan extensions, short-term balances becoming longer, loan repayments prior to maturity, larger than normal volume of IC lending, issuing of intercompany guarantees, changes to external financing costs, etc.
How can we help you?
The EY Denmark transfer pricing team offers market leading assistance and advisory within transfer pricing and financial transactions. Our team can assist and advise treasury and tax functions within MNEs with navigating and mitigating tax risk exposures:
- Advise on exploitation of intra-group financial arrangements to manage liquidity challenges across your business without being a source of tax risk
- Assess potential areas of exposure and monitor the impact of any local country developments and or responses related COVID-19;
- Perform health-check on material intra-group financial arrangements in light of new OECD Guidance and impact from COVID-19;
- Update and/or design practical transfer pricing policies and operating procedures in line with OECD Guidance;
- Advise on consistent implementation of policies;
- Assist to ensure that strong defence files are available and contemporaneous
With the new and ground-breaking guidance from OECD on intra-group financial transaction and the current disruption from COVID-19, combined with expected increased focus by tax authorities globally on intercompany financial transactions, it is now time for MNEs to prioritize identification, assessment, management and risk mitigation initiatives relating to intercompany financing arrangements.
Justin Breau, tel. +45 2529 3932
Henrik Arhnung, tel. +45 5158 2649
Henrik Morthensen, tel. +45 2529 4571
Jeppe Andersen, tel. +45 2529 6734
Jakob Bay Klausen, tel. + 45 2529 3751