Organizations that engage in inter-company financial transactions such as: charging interest on inter-company debt, guarantee fees, and accounts receivable factoring must apply the arm’s length principle in determining the interest (or discount) rates used to avoid potentially significant transfer pricing adjustments. Unfortunately, while tax authorities have not provided formal guidance on identifying the appropriate arm’s length compensation for these transactions, they have increased their audit scrutiny.
In some jurisdictions, tax authorities review both the interest rates and the terms and amounts an arm’s length lender would offer. Because a company’s capitalization affects its cost of funds, it is increasingly important to identify an arm's length capital structure in addition to the interest rate on inter-company debt. In all related-company transactions, a reasonable rate should be based on the best information available and documented.
How PricewaterhouseCoopers can help
PricewaterhouseCoopers’ Transfer Pricing practice has established a global team of financial transactions specialists who use our firm’s experience to help organizations around the world. We can help you plan, document and defend your inter-company financial transactions in any country.
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