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Intercompany Finance: Applying the Arm's Length Principle

Intercompany financing transactions now at record levels, have come under increasing scrutiny from tax authorities globally.

At the same time internationalization and offshoring, already common practices in production and distribution, have extended to financing activities. Intercompany loans and guarantees have been added to the list of available options to fund growth in businesses within large multinational enterprises (MNEs).

KEY BUSINESS DRIVERS FOR INTERCOMPANY FINANCING COULD INCLUDE:

  • Ideal allocation of debt versus equity within the MNE to support shareholder value creation
  • Optimal capitalisation of entities within a group to meet investment requirements
  • Leveraging the different levels of access to funding of various entities within a group

A key challenge for market participants, in this environment, is the lack of a formalised framework for assessing and reporting on whether the terms used in intercompany financing transactions are fit for purpose. There is a risk that corporations are organising these transactions in ways that could be interpreted as ‘thin capitalisation’, ‘profit shifting’ or other tax avoidance practices.

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S&P Capital IQ Intercompany Finance Report May 2015