Transfer pricing documentation for intercompany loans – More than just the price?

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Transfer Pricing Documentation for Intercompany Loans – More than just the price?

Intercompany loans continue to be a hot topic and focus point for the Tax Authorities around the world as this type of transactions are considered high risk from a transfer pricing prospective. If your company has entered into intercompany loans it is critical to assess any transfer pricing risk related with the transaction and to have evidence of compliance with the arm’s length principle.

Under Australia’s new transfer pricing legislation, demonstrating the arm’s length nature of the interest rate only will not provide taxpayers with sufficient compliance with the arm’s length principle. Taxpayers will also have to include the following information in their transfer pricing documentation:

• Credit rating analysis of the borrower
• Demonstrating the borrower is capitalized in accordance with the arm’s length principle (i.e. the quantum of the debt is arm’s length)
• Demonstrate that the intercompany loan is commercially viable (e.g. providing evidence that the terms of the intercompany loan are commercially realistic and that the finance expenses are commercially viable)
• Provide reasons on whether the basic rule and exceptions of Section 815-130 (reconstruction powers provision) apply or not to the intercompany loan.

Taxpayers are advised to review and/or prepare transfer pricing documentation to provide evidence of compliance with the arm’s length principle ensuring that the above information is included as part of the transfer pricing analysis.

For more information please contact Transfer Pricing Solutions on 03 5911 7001 or email admin@transferpricingsolutions.com.au.