I’d like to share some thoughts on a recent development that David Zářecký alerted me to.
On December 19, 2023, the Office of Chief Counsel of the IRS issued a memo with ‘non-taxpayer-specific legal advice’ regarding the application of US transfer pricing rules to intra-group loans.
The question was whether the IRS could take into account group membership (and in particular ‘implicit support’) in determining the arm’s length rate of interest chargeable for intra-group loans.
The short answer was ‘yes’ – broadly in line with the approach taken in the OECD Transfer Pricing Guidelines 2022. Implicit support from a parent company may be taken to account, even where the parent company is the lender. This may seem counter-intuitive, but of course it makes sense from the perspective of the borrower (and the terms on which it may secure finance from an unconnected third party). And, obviously, the legal and TP analysis of intra-group debt is always two-sided.
The memo acknowledges the two main factors which influence the pricing of a related party loan, namely:
- The credit rating of the borrower (including the impact of implicit support where applicable); and
- The terms of the loan – which, in the words of the memo, include “e.g., principal amount, issuance date, duration, payment schedule, default triggers”.
Unsurprisingly, fit-for-purpose intercompany agreements are essential in this situation. Not least because, from a practical perspective, it is almost impossible for a taxpayer to clearly evidence the terms of the loan without producing a duly executed intercompany loan agreement which sets out the relevant terms clearly and unambiguously.
