There has been considerable focus from revenue authorities around the world in recent years on related-party financing arrangements, and this is reflected in the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Action Plan.
From an Australian transfer pricing perspective, related-party financing has featured strongly in Australian Taxation Office (ATO) audit and litigation activity over the last few years and in newly enacted transfer pricing law with its concept of “arm’s length conditions” providing fertile ground for potential dispute in this area.
The new rules require taxpayers to consider, support and price-related party financing (and other) arrangements on the basis of terms and conditions that might be expected to operate between independent parties. There are some key aspects or conditions in financing arrangements that can have a profound effect on arm’s length pricing and are consistently the subject of debate with the ATO upon review:
- Credit rating of the borrower and whether parental affiliation (implied support) to be considered and factored in
- The debt / gearing level
- Maturity / tenor
These are equally applicable to situations when the parent company or an affiliate has provided a guarantee to support the local subsidiary’s third-party borrowings.
Option for APA
Given the spotlight currently on related-party financing arrangements and the possibility of contention, taxpayers proposing to refinance existing related-party borrowings, or implement new arrangements, may want to consider an advance pricing agreement (APA).
For instance, a bilateral APA would mitigate the risk that two revenue authorities (with opposing perspectives on the arm’s length interest rate) would come to different views on any of the key aspects of a related-party financing arrangement and, in particular—given the ATO’s position concerning inbound financings—the applicability of parent company affiliation for credit-rating purposes.
Read a December 2013 report prepared by the KPMG member firm in Australia: Consider APAs for related party financing arrangements
Contact a tax professional with KPMG's Global Transfer Pricing Services.