Transfer Pricing for Intragroup Financing: Aligning Terms with Commercial Reality

Ensuring that the terms reflect commercial reality, and as a consequence are in line with the arm’s length principle, is critical to managing tax risk and meeting regulatory expectations.

Understanding Intragroup Financial Transactions

Intragroup financing typically includes intercompany loans, financial guarantees, and participation in group treasury functions such as for example cash pooling. When assessing whether intra group financing transactions are on an arm’s length basis and in line with what would be acceptable between unrelated parties in similar circumstances, there are multiple components that must be taken into account.

This includes not just the interest rate, but also factors such as the repayment terms, the duration of the financing arrangements, the collateral, implicit supply,  the borrower’s credit profile and eventually even the importance of a specific entity within the MNE group.

OECD Guidance and Tax Authority Expectations

The OECD's 2020 transfer pricing guidance on financial transactions clarified several areas of concern. 
Tax authorities are increasingly focusing on whether:

• Interest rates are appropriately benchmarked.
• The terms and conditions of loans are clearly documented.
• Guarantees are priced at arm's length.
• Cash pooling arrangements reflect each participant's risk and benefit.

The OECD’s guidance reinforced the need for substance over form, requiring multinationals to justify the commercial rationale behind financing arrangements.

Common Pressure Points in Intragroup Financing

Several aspects of intragroup financing tend to attract scrutiny:

• Unsupported interest rates: Applying a group-wide rate without carrying out a benchmarking study that appropriately factors in the financing arrangements terms and the borrower’s posiiton. Lack of agreements: Transactions without formal documentation leave little defence in case of enquiry.
• Misaligned terms: Terms that wouldn’t be offered between third parties (e.g. indefinite repayment, no security, no reasonable expectation of loan repayment) may be challenged.
• Guarantees without remuneration: Providing financial guarantees without charging a fee may also create exposure.

Practical Considerations

To align intragroup financing with commercial reality, businesses should:

1. Benchmark interest rates: Use relevant credit ratings and public data to support pricing. Consider factors such as currency, duration, and economic conditions.
2. Clearly document the financing arrangement: Set out terms, conditions, repayment expectations, and any covenants in formal agreements.
3. Assess creditworthiness: Treat related parties as independent borrowers, evaluating their financial capacity and risk profile.
4. Review guarantees: Ensure that financial guarantees are priced in line with the benefit received, particularly when external borrowing costs are reduced as a result.
5. Maintain internal consistency: Align financing terms with other group policies and ensure consistency across the Master File, Local File, and financial statements.

Intragroup financial transactions can be efficient tools for managing liquidity, but they require careful attention to pricing and documentation. Aligning terms with commercial practice strengthens a group’s transfer pricing position and reduces the risk of disputes. Addressing these issues in a structured and timely manner supports both compliance and financial clarity.

How We Can Help

At BDO Malta, we support businesses in reviewing, documenting, and benchmarking their intragroup financing arrangements. From loan agreements to cash pooling reviews, our team helps ensure that financial transactions are properly structured and defensible. Get in touch to discuss how we can assist your organisation.

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