Consequences of lack of legal documentation of intercompany financial transactions

As you probably know, the OECD has recently released a non-consensus discussion draft on the Transfer Pricing treatment of financial transactions between associated enterprises, under the BEPS project. You can download the discussion draft here.

The types of arrangements considered include intra group loans, guarantees, hedging, cash pooling and captive insurance. As you would expect, the starting point for any TP analysis is to look at the written contractual terms (if there are any) in place between the group companies, and to assess whether those written terms are consistent with the actual conduct of the parties.

It’s probably fair to say many multinational groups pay less attention to the legal documentation of intra-group financing arrangements, than they do to intercompany agreements for other transactions. But it’s arguable that the consequences of a lack of legal documentation for financial transactions may be more severe, because there is potentially more uncertainty about the fundamental nature of the arrangement – was a payment intended to represent a loan or equity? Or some other form of contribution? What is the currency of the obligation? Ambiguity around these fundamental issues can seriously undermine the robustness of a group’s transfer pricing strategy, when subject to challenge from national tax administrations.

If you would like to take a step towards improving your Transfer Pricing compliance through intercompany agreements, you can get in touch by emailing us at info@lcnlegal.com or calling us on +44 20 3286 8868. We will be happy to help.