What documentation do I have to prepare for intercompany loans?
Companies have the following two alternatives for compliance with transfer pricing:
(1) Documenting application of low-level inbound loan safe harbour rules (if eligible); or
(2) Preparation of transfer pricing documentation and benchmarking.
Both alternatives involve preparation of some documentation, but the content and work involved in compiling this document will vary between the two options.
Why is it important to prepare documentation?
The short answer is risk mitigation and assurance.
When times get tough with tax authorities, documentation will give your company assurance in various ways including:
- Your company will be eligible for penalty reduction in the event of a transfer pricing adjustment;
- Supporting disclosures in the International Dealing Schedule (IDS);
- Documentation is seen as ‘good practice’ by tax authorities and will assist when answering questions in an audit.
What is the low-level inbound loan safe harbour?
The safe harbour is available for companies in Australia that entered into an intercompany loan with the following main characteristics:
- Loan borrowed in AUD from its international related parties;
- Interest expenses paid in AUD;
- Interest rate agreed is not higher than interest rate published by the Reserve Bank of Australia for “small business; variable; residential-secured; term”;
- The Australian Economic Group’s cross-border loan balance is A$50 million or less for the financial year;
- Comply with all the other eligibility criteria.
<subhead> What do I need to do if my company is eligible for the safe harbour?
If the company ‘ticks’ all the eligibility criteria, it will be required to prepare a simplified document explaining how the company complies with the criteria.
What are the eligibility criteria for the safe harbour?
| Eligibility Criteria | Practical Application |
| 1. The company combined cross-border loan balance is A$50 million or less for the Australian economic group at all times during the year. | The cross-border loan balance is calculated by aggregating all interest bearing and interest-free loans borrowed and loaned by the Australian Economic Group. |
| 2. Have not derived sustained losses. | The company did not incur in losses for three consecutive years including the year under review. |
| 3. Do not have related party dealings with entities in specified countries. | Specified countries is a list of low-tax countries such as Bahamas, BVI, Jersey. It doesn’t include Singapore and Hong Kong. |
| 4. Have not undergone a restructure during the year. | Restructure refers to arrangements in which assets, functions or risks of a business are transferred between the international related parties. |
| 5. The interest rate is no more than the Reserve Bank of Australia indicator lending rate for “small business; variable; residential-secured; term” as published by the RBA monthly | This interest rate is published on the RBA website on this link http://www.rba.gov.au/statistics/tables/#interest-rates see F5 tables column B. |
| 6. The funds provided under the loan are AUD funds and this is reflected in the written loan agreement | A written agreement is recommended outlining that the loan is agreed in AUD. Loans in USD and other currencies are not eligible. |
| 7. Associated expenses are paid in AUD | A written agreement is recommended outlining that the interest expenses should be paid in AUD. |
What do I need to do if I cannot apply the safe harbour?
If a company fails to comply with all the eligibility criteria, it will have to prepare complete transfer pricing documentation. This documentation involves more than demonstrating the interest rate is at arm’s length. It requires a detailed analysis of the following:
- Credit rating analysis of the borrower;
- Demonstrating the borrower is capitalised in accordance with the arm’s length principle;
- Demonstrating the intercompany loan is supported by commercial and financial reasons;
- Analysing the application of the reconstruction powers provisions (Section 815-130); and
- Benchmarking analysis of the interest rate.
Is transfer pricing documentation for inter-company loans the same as other transactions?
Documentation for inter-company loans is more specialised than preparing documentation for other inter-company transactions as it requires:
- One or more specialised databases such as loanconnector and Bloomberg;
- Expertise on how to use the database; and
- Basic understanding of financial principles and how third parties (e.g. banks) priced loans.
Shannon Smit, founding director, Transfer Pricing Solutions and Adriana Calderon, director, Transfer Pricing Solutions
