Setting the Scene – Treasury & Tax Requirements
Intercompany and corporate finance is an important topic on the treasurer’s agenda. International organizations must give sufficient attention to intercompany transaction pricing as they increasingly face regulatory requirements that scrutinize intercompany pricing activity. The OECD’s BEPS regulation aims to deal with tax planning policies that exploit disparities in tax rules to artificially shift profits to low or no-tax locations. Non-compliance will cause serious penalties , thus companies must adapt and streamline their intercompany financing practices.
Your Challenge – BEPS & Transfer Pricing Compliance
BEPS requires international companies to price their intercompany transactions at arm’s length, i.e. as if they were priced by an independent party. To prove that intercompany transactions are priced consistently with an arm’s length approach, corporates will need to clarify the rationale behind their intercompany transaction pricing. Although different methods may be used to define a fair transfer price, the Comparable Uncontrolled Price (CUP) Method is the global best practice. The CUP method compares intercompany transactions to others similar transactions on the market, facilitating the approval by regulators and reducing the chance of an inquiry by tax authorities. However, there is barely market pricing information available to use for the majority of intercompany transactions. This lack of information requires another calculation method that becomes a complex exercise when different types and structures of intercompany transactions are combined with different currencies and repayment schedules.
Our Solution – Intercompany Rating & Pricing Tool
Our BEPS compliant solution, available on the Zanders Inside™ platform, is the Intercompany Rating & Pricing (ICRP) tool which offers our multinational corporate clients “arm’s length” transfer pricing documentation for intercompany finance transactions. The ICRP tool uses a bottom-up approach to price the intercompany transactions by:
- Analyzing subsidiary’s balance sheet and P&L statement
- Determining stand-alone subsidiary credit rating
- Applying qualitative and/or group support adjustments
- Looking up credit spread to set arm’s length price
The ICRP tool is a transparent best practice solution based on the Basel credit risk methodology (PD, EAD, M & LGD) using publicly available credit spreads derived from bond markets, which means no “black box” calculations you cannot explain to regulators. The pricing exercise is available for different intercompany finance instruments (term loans, current accounts, credit facilities, loan guarantees and leases), rankings (senior secured, senior unsecured, subordinated and near-equity), currencies, repayment schedules, and tenors. The ICRP Tool is time- and cost-efficient and provides a straightforward and objective methodology for arm’s length pricing of intercompany financing and facilities.
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