Transfer Pricing Guidelines

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“Implicit support” comes charging out of the gates as an early candidate for Word or Phrase of the Year for 2024. 

Before year’s end, the IRS Office of Chief Counsel dropped a new generic legal advice memorandum (“GLAM”), AM 2023-008, titled “Effect of Group Membership on Financial Transactions under Section 482 and Treas. Reg. § 1.482-2(a).” The GLAM visits some familiar territory, including the “realistic alternatives” principle, this time in the intracompany lending context.  Continue Reading Happy New Year.  Here’s a GLAM on Implicit Support.

DCF - Discounted Cash Flow.

In November, the IRS Office of Chief Counsel issued a generic legal advice memorandum (“GLAM”) AM-2022-006, titled “Realistic Alternatives and Tax Considerations in the Application of Sections 482 and 367(d).” As the title suggests, the GLAM analyzes the realistic alternatives principle, which was codified in section 482 by the Tax Cuts and Jobs Act (Pub. L. No. 115-97).

The realistic alternatives principle, of course, is not new and has been part of the section 482 regulations since 1993. See Treas. Reg. § 1.482-1(d)(3)(iv); 58 Fed. Reg. 5253, 5266, 5275 (Jan. 21, 1993). But the realistic alternatives regulatory provisions were short on practical substantive guidance. Thus, the GLAM provides new insight into how the IRS currently thinks the realistic alternatives principle ought to be applied. In sum, the GLAM applies concepts from the corporate finance discounted cash flow (“DCF”) valuation method to make its realistic alternative comparisons.Continue Reading GLAM’s Realistic Alternatives Analysis Adopts Corporate Valuation DCF Concepts

On January 20, 2022, the OECD released the latest version of its OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The 2022 Transfer Pricing Guidelines update the 2017 edition by incorporating guidance released by the OECD over the past few years on the transactional profit split method, hard-to-value intangibles, and financial transactions. Although there is no completely new guidance in the 2022 Transfer Pricing Guidelines, some of the previously released guidance now formally incorporated in the Guidelines is quite significant. This includes new Chapter X on financial transactions, which among other guidance incorporates proposed and controversial changes to the Commentary on Article 9 of the OECD Model Tax Convention.
Continue Reading The 2022 OECD Transfer Pricing Guidelines: Mostly An Update

In February 2020, the Organization for Economic Cooperation and Development (“OECD”) released Transfer Pricing Guidance on Financial Transactions (“Guidance”). The Guidance is significant because it is the first time that the OECD’s Transfer Pricing Guidelines have been updated to include guidance on the transfer pricing aspects of financial transactions. The OECD expects that the Guidance should contribute to consistency in the application of transfer pricing and help to avoid transfer pricing disputes and double taxation. The Guidance addresses specific issues related to the pricing of financial transactions, such as treasury functions, intra-group loans, cash pooling, hedging, and guarantees. Those issues are the subject of separate posts. This post covers captive insurance.

The term “captive insurance” is intended to refer to an insurance undertaking or entity substantially all of whose insurance business is to provide insurance policies for risks of entities of the MNE group to which it belongs. The term “reinsurance” refers to a reinsurance undertaking or entity the purpose of which is to provide reinsurance policies for risks of unrelated parties that are in the first instance insured by entities of the MNE group to which it belongs.

Captive Insurers may be self-managed from within the MNE group, or managed by an unrelated service provider (often a division of a large insurance broker). Typically this management would include ensuring compliance with local law, issuing policy documents, collecting premiums, paying claims, preparing reports and providing local directors. If the captive insurance is managed from within the MNE group it is necessary to determine which entity manages it and to appropriately reward that management.

In order to consider the transfer pricing implications of a transaction with a captive insurer, the initial question will be whether the transaction under consideration is one of insurance. This analysis requires consideration of whether the risk has been assumed by the insurer and whether risk diversification has been achieved. Where the captive insurer insures the risk and reinsures it in the open market, it should receive an appropriate reward for the basic services it provides.

With respect to pricing of premiums, comparable uncontrolled prices may be available from comparable arrangements between unrelated parties. These may be internal comparables if the captive insurer has suitably similar business with unrelated customers, or there may be external comparables. Alternatively, actuarial analysis may be an appropriate method to independently determine the premium likely to be required at arm’s length for insurance of a particular risk. The remuneration of the captive insurer can also be arrived at by considering the arm’s length profitability of the captive insurer by reference to a two-staged approach, which takes into account both profitability of claims (the “combined ratio”) and return on capital.Continue Reading OECD Guidance on Financial Transactions: Captive Insurance

Brazil flag

In February 2018, the OECD and Brazil started a joint project to analyze the similarities and differences between Brazilian legislation and the transfer pricing (“TP”) frameworks to assess cross-border transactions between associated enterprises from a tax standpoint. This project is within the scope of Brazil’s initiative to engage with the OECD in tax-related projects, and, in a broader respects, consistent with Brazil’s interest in initiating the process to join the OECD.
Continue Reading General View of the Project “Transfer Pricing in Brazil”

one person swimming on clear blue water covered with hundred dollar bill

In February 2020, the Organization for Economic Cooperation and Development (“OECD”) released Transfer Pricing Guidance on Financial Transactions (“Guidance”). The Guidance is significant because it is the first time that the OECD’s Transfer Pricing Guidelines have been updated to include guidance on the transfer pricing aspects of financial transactions. The use of a cash pool is popular among multinational enterprises as a way of achieving more efficient cash management by bringing together, either physically or notionally, the balances on a number of separate bank accounts. In a typical physical pooling arrangement, the bank account balances of all the pool members are transferred daily to a single central bank account owned by the cash pool leader. In a notional cash pool, some of the benefits of combining credit and debit balances of several accounts are achieved without any physical transfer of balances between the participating members’ accounts. As cash pooling is not undertaken regularly, if at all, by independent enterprises, the application of transfer pricing principles requires careful consideration. According to the OECD, a cash pool is likely to differ from a straightforward overnight deposit with a bank in that a cash pool member with a credit position is not depositing money as a transaction with a view to a simple depositor return. Rather, the cash pool member is likely to be participating in providing liquidity as part of a broader group strategy, in which the member can have a credit or debit position. The appropriate reward of the cash pool leader will depend on the functions performed, the assets used and the risks assumed in facilitating a cash pooling arrangement. A cash pool leader may perform no more than a coordination or agency function with the master account being a centralized point for a series of book entries to meet predetermined target balances of pool members. Under these circumstances, the cash pool leader’s remuneration as a service provider will generally be limited. Where a cash pool leader is carrying on activities other than coordination or agency functions, the pricing of such transactions would be adjusted appropriately. The remuneration of the cash pool members will be calculated through the determination of the arm’s length interest rates applicable to the debit and credit positions within the pool. This determination will allocate any synergy benefits arising from the cash pool arrangement amongst the pool members and it will generally be done once the remuneration of the cash pool leader has been calculated.
Continue Reading OECD on Cash Pooling