Intercompany Financing Transfer Pricing: Challenges Within an Ever Changing Environment

Transcription

1 Intercompany Financing Transfer Pricing: Challenges Within an Ever Changing Environment James West Head of Market Development, Corporates, EMEA S&P Global Market Intelligence Ernest Breitschwerdt, CFA Senior Business Development Specialist S&P Global Market Intelligence Daniel Head Partner, Global Transfer Pricing Services KPMG Ishan Maini, CFA Senior Manager, Transfer Pricing Group Deloitte Stephen Weston Partner Deloitte Tuesday 26 th April, 2016 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public. Copyright 2016 by S&P Global Market Intelligence. All rights reserved.

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3 Today s Speakers James West Head of Market Development, Corporates, EMEA S&P Global Market Intelligence Ernest Breitschwerdt, CFA Senior Business Development Specialist S&P Global Market Intelligence Daniel Head Partner, Global Transfer Pricing Services KPMG Ishan Maini Senior Manager, Transfer Pricing Group Deloitte Stephen Weston Partner Deloitte 3 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

4 Transfer pricing of financing Pricing approaches and other considerations BEPS considerations Key actions relevant to financing Cash boxes Case study an approach to pricing intercompany debt Recent case law developments 4

5 Action 2 Action 4 Action 6 Actions 8-10 Action KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 5 Document Classification: KPMG Public

6 Align taxation of profits with substance (e.g. key personnel) HoldCo Returns not to accrue to an entity solely because it has contractually assumed risks or provided capital FinCo OpCos OpCos Risk free capital return or less where no functionality performed Low tax jurisdiction Provision of finance Does the actual transaction have commercial rationality? Interaction with BEPS Action 3 - Controlled Foreign Company regime and BEPS Action 4 Interest Deductibility 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 6 Document Classification: KPMG Public

7 7 Case Study Financing: An approach to transfer pricing

8 Intercompany financing Case study - overview Group Company A Intercompany loan provided by Company A in Country X to its related party Company B in Country Y. $100m LIBOR + 4% Amount $100m, 5 year term, interest rate LIBOR + 4.0%. Country X Country Y Group Company B Both Country Y and Country X have transfer pricing rules based on the arm s length principle. Transfer pricing analysis required to test the transaction. 8

9 Intercompany financing Case study assessing credit strength Group Company A Country X Country Y $100m LIBOR + 4% OECD-approved transfer pricing methods can be applied to determine arm s length terms for the intercompany loan. Tax authorities generally accept some form of credit analysis in combination with benchmarking against comparable instruments. Assessment of creditworthiness can be based on the use of credit scoring methods, including: o Discretionary credit rating analysis, and o Quantitative credit rating analysis. Group Company B Not recommended for anything more than an indicative assessment of arm s length borrowing capacity separate test required here. 9

10 Intercompany financing Case study implicit support Group Company A Country X Country Y Group Company B $100m LIBOR + 4% A group company may enjoy a benefit from its association with other companies in the group either through an explicit guarantee or through the implicit support from its passive association with these companies. Both explicit and implicit support would have an effect on the appropriate arm s length terms. Different tax administrations and have different views on whether, in the absence of an explicit guarantee, a borrower should be considered as standalone or the group context should be taken into account. OECD have provided guidance on group synergies. Tax case law, including GE Capital Canada Inc. Rating agency approach assessment of the core nature of the subsidiaries. More OECD guidance next year? 10

11 Transfer Pricing Guidelines passive association Revised Chapter 1 D.8 MNE Group synergy Example 1 (FS business) Example 2 P AAA P AAA guarantee T? S Lend at A 3P S Lend at AAA rate 3P Baa Baa T loan same T&C etc Also at A rating Arm s length as (i) CUP S should pay guarantee fee to P as deliberate action But based on A to AAA benefit Passive association not compensated (ii) passive association not compensated/adjust for 11

12 Intercompany financing Case study comparable data Group Company A Country X Country Y Group Company B $100m LIBOR + 4% Bank market and capital market can provide benchmarking data for determining an arm s length yield Bond yield data generally more available and provides more transparent pricing due to richer secondary market trading data. Consider size / profile of borrower Depends on terms of tested instrument, consider: Fees Ability to draw up / draw down Market of issue Covenants Fixed vs floating rates Collateral Optionality adjustments 12

13 Financing: Transfer Pricing considerations Recent case law developments Chevron Australia ANTS plc Conoco Phillips Danish case Finnish case 13

14 Transfer Pricing case law Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation [2015] FCA P USD CP USD LIBOR (c1-2%) CFC (US) Chevron Inc (US) AUD loan (USD 2.5bn AUD LIBOR % CAHPL (Aus) CFC loan to CAHPL terms: 5 year term Unsecured No covenants CFC not taxable in US on interest income ATO challenged AUD loan transfer pricing Summary findings/takeaways: Article 9 not separate taxing right ATO can adjust other factors not just price e.g. security and loan covenants ( consideration ) Can substitute arm s length conditions without need to apply re-characterisation Currency View on practical aspects of implicit support Expert witnesses 14

15 Presenter contact details If you have any questions for the Deloitte speakers or would like more information, please contact them directly on: Ishan Maini +44 (0) Stephen Weston +44 (0)

16 Transfer Pricing Workflow - Setting The Scene For an intercompany financing transaction... 3m - from Italian parent transferred to German subsidiary on December 31, 2015 Senior unsecured 6y tenor Textiles industry...questions to answer... Is the subsidiary capitalized consistent with the arm s length principle? Will the subsidiary be able to service its debt obligations? Can the subsidiary borrow the amount of debt given current market conditions? Is the financing transaction priced in accordance with the arm s length principle? 16 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

17 Transfer Pricing Workflow - Step 1: Analyze Debt Capacity Financial Comparables Analysis allows to compare, e.g., industry specific leverage ratios, the debt service capacity, and profitability parameter Source: S&P Global Market Intelligence Point-In-Time Fundamentals. As of 15 th April For illustrative purposes only. 17 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

18 Transfer Pricing Workflow - Step 1: Analyze Debt Capacity Financial Comparables Analysis allows to compare e.g. industry specific leverage ratios, the debt service capacity & profitability parameter Source: S&P Global Market Intelligence Point-In-Time Fundamentals. As of 15 th April For illustrative purposes only. 18 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

19 Transfer Pricing Workflow - Step 1: Analyze Debt Capacity!! Financial Comparables Analysis allows to compare e.g. industry specific leverage ratios, the debt service capacity & profitability parameter Source: S&P Global Market Intelligence Point-In-Time Fundamentals. As of 15 th April For illustrative purposes only. 19 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

20 Transfer Pricing Workflow - Step 2: Settings For Credit Risk Scoring Quantitative Credit Scoring Model - Selection CreditModel calibrated to Standard & Poor s ratings PD Model Fundamentals - calibrated to observed defaults Region & Industry specific Corporates, Banks, Insurers, Real Estate Global applicability Standardized Input Factors Parental & Government Support Overlay Quantitative Qualitative override (Support Expectation) Financials Imputation logic Post loan agreement 20 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

21 Transfer Pricing Workflow - Step 3: Credit Risk Assessment Credit Risk Assessment Outputs: Standalone Credit Risk Score Standalone Credit Risk Score + Parental & Government Support Overlay Standalone Credit Risk Score + Parental & Government Support Overlay + Sovereign Cap Source: S&P Global Market Intelligence Credit Analytics. As of 11 th April For illustrative purposes only. 21 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

22 Transfer Pricing Workflow - Step 3: Credit Risk Assessment Credit Risk Assessment Insights: Benchmark Analysis (Industry, Country, Index Min / Max, 10th & 90th Percentile, Top & Bottom Quartile) Ratio Values Sensititvities Parental & Government Support Considerations Source: S&P Global Market Intelligence Credit Analytics. As of 11 th April For illustrative purposes only. 22 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

23 Transfer Pricing Workflow - Step 4: Analyze Debt Capacity (again)!! Financial Comparables Analysis allows to compare e.g. industry specific leverage ratios, the debt service capacity & profitability parameter Source: S&P Global Market Intelligence Point-In-Time Fundamentals. As of 15 th April For illustrative purposes only. 23 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

24 Transfer Pricing Workflow - Step 4: Analyze Debt Capacity (again) Source: S&P Global Market Intelligence Point-In-Time Fundamentals. As of 15 th April For illustrative purposes only. 24 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

25 Transfer Pricing Workflow - Step 4: Analyze Debt Capacity (again) Create more consistent peer groups Source: S&P Global Market Intelligence Point-In-Time Fundamentals. As of 15 th April For illustrative purposes only. 25 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

26 Transfer Pricing Workflow - Step 5: Credit Risk Pricing Credit Risk Pricing: split into a risk-free Benchmark Rate and an option-adjusted Spread, returning an "All In Yield" without lack of coverage Transparency down to the underlying bonds Source: S&P Global Market Intelligence Credit Analytics. As of 11 th April For illustrative purposes only. 26 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.

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