As such, the report states that the guidance “should contribute to consistency in the application of transfer pricing and help avoid transfer pricing disputes and double taxation.” But what does the guidance mean for corporate treasurers?
Areas of focus
David Stebbings, Director, Head of Treasury Advisory at PwC, says that a key focus of the guidance is on inter-company, cross-border financing transactions. For treasurers, he says, the most significant operational considerations include the following:
Delineation – the guidance focuses on the concept of delineation, thereby highlighting situations in which business practices may not be aligned with the contractual terms of lending decisions being made. For example, does the company lending the monies have enough expertise to take such decisions to earn the margin on the loan given, or does that need to be shared with a treasury team resident in another jurisdiction?
Treasury centres – the starting premise is that the treasury function is a service function for the wider business. Thus, having a decentralised inter-company pricing policy, and/or very different intercompany lending terms to that of external group borrowings, may become more difficult. There may also be an additional burden for companies to fully document inter-company loans, and manage and comply with covenants and other clauses just as they would on third party equivalents.
Cash pooling – most cash pools provide synergy returns to the leader entity. The treasurer needs to question whether the pool header carrying out activities can justify the income generated by the structure and the way in which this is allocated. The treasurer also needs to test cash pool lending and borrowing rates against rates in the participants’ local markets (to ensure there is a benefit for the local subsidiaries in entering the intercompany cash pool) and separately ensure are all cash pool balances are really short term.
Guarantees – if the company has guarantees on intra-group transactions, the treasurer needs to consider how these should be priced. This requires not only taking account of how much real benefit the borrower gets, given the implicit support of being part of the wider corporate group, but also whether the guarantor really has the ability financially to provide the guarantee as documented, and whether the guaranteed entity could have borrowed at all in the absence of the guarantee.
Captive insurance companies – the treasurer needs to consider whether the use of a captive insurance company and its set up is appropriate for what the business is looking to achieve.
Whilst the guidance is consistent with the direction of travel already set by the BEPS initiative by the OECD, it does have real implications for corporate treasurers to have the right structures, policies and practices in place, given the likely uptick now in tax authority challenges in local territories.
Cash pooling is a case in point, as Stebbings’ colleague Daniel Pybus, Director Transfer Pricing at PwC explains. Pybus notes that in the case of a physical cash pool, the header entity carries out activities in order to produce an intercompany position – and hence can perhaps better justify synergy returns than might be the case with notional pooling, where almost all of the operational work is arguably carried out by the bank.
As such, Stebbings and Pybus recommend that treasurers should work closely with their tax colleagues to achieve compliance with requirements in the OECD paper. In addition, they emphasise the importance of making sure that all analysis is performed regularly and tested against the group treasury policy and external market behaviour more generally; that transaction terms are adjusted as required, documentation is fully current – and that transactions are operationalised in line with the documentation.
“Tax authorities are going to be a lot more stringent on a go-forward basis, and as such, treasurers should make sure they are clear and consistent on the terms for their intercompany loans, cash pools and guarantees, how they benchmark them and how they align to group treasury policy,” Pybus comments. “Once that is done, it’s also important to bring all documentation up to date and manage/revisit it effectively on an ongoing basis, rather than getting things set up and then forgetting about it.”