The advance of globalization with its far-reaching consequences for companies with cross-border transactions, combined with closer collaboration between tax authorities worldwide, presents new challenges across all corporate segments. This development is particularly discernible in intragroup Treasury as the liquidity management of companies with international operations is not only significant for operations, it is also increasingly significant from a tax perspective.
This focus arises from the extensive scope Treasury has to organize intragroup service transactions which, in connection with the universal issue of tax-optimized profit shifting or 'base erosion and profit shifting' (BEPS), attracts the increasing attention of tax authorities.
This often leads to tax risks that stem from the original portfolio of Treasury and can only be identified in the light of current tax developments. In our experience, the finance and tax experts of a company are all too seldom involved in a lively discussion on requirements and relevant rules. In practice, this cross-divisional dialog often has an unreservedly positive effect (from an operational and tax viewpoint) on the entire company despite the challenges presented.
The arm’s length principle: more complex than previously thought
From the tax perspective on transfer pricing, cross-border transactions between affiliated companies need to withstand the so-called arm's length principle. The upshot of this principle is that all intragroup financing transactions must be organized and cleared as if they were conducted with third parties (at arm's length). All types of intragroup loans, cash pools, guarantee fees, including liquidity settlement at banks can be identified as examples of transactions currently under discussion and regularly addressed in tax audits. The specific focus here is often on the arm's length transaction of loan interest, the appropriate apportionment of cash pool benefits between cash pool masters and cash pool participants as well as the clearing of guarantee and liquidity provision fees. As a consequence, commercial freedom in these areas fundamentally entails the risk of failing to incorporate tax risks into the design of processes.
In order to ensure that the 'prices' of internal transactions are on an arm's length basis, specific nationally and internationally recognized transfer pricing methods have been developed. The “comparable uncontrolled price method“ and the "cost plus method“, which both fall under transactional methods and are deemed appropriate in most instances, are applied to transactions executed by Treasury and Finance. The decisive factor in transaction-related transfer pricing methods is that internal and/or external data can be used as comparable for a defined service transaction. In specific cases, there is also the option to apply the "profit split method" to complex and highly integrated service transactions to properly compensate the value added by individual participants.
Using the available transfer pricing methods, it becomes apparent that an appropriate commercial- and tax-efficient implementation of the relevant systems can only be achieved in close collaboration with the group divisions concerned. More often than not, the objectives of Treasury and Tax are not directly correlated, a fact that the tax authorities fail to consider in their tax audits. In this regard, the strategy of tax transfer pricing processes in multinational companies is to reconcile an optimized liquidity management, efficient compliance and the mitigation of tax risks.
Eliminating the challenges derived from the conflicting priorities of liquidity management, tax regulations and ever-changing conditions appears, at first glance, to involve considerable administrative expenses and high costs. Our experience shows, however, that an adjustment of existing intragroup systems and processes can be accomplished involving manageable effort and expense relative to the tax risks. It is recommended, for example, to draft financing guidelines that have been worded and implemented in accordance with fiscally accepted transfer pricing methods. These guidelines can then serve as the basis for tax transfer pricing documentation; thus they not only regulate operating processes and responsibilities but also ensure that tax risks are managed.
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