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Transfer Pricing in Financial Services industry

Blog series

The area of transfer pricing is evolving quickly with the introduction of new guidance and legislation, changes in business models, increasing sophistication in transfer pricing models and a very active audit landscape. This is particularly the case in the area of Financial Services and Financial Transactions TP. On this blog we share the insights, learnings and best practices from our experts as experienced in practice.

Welcome to the Deloitte Netherlands - Belgium Financial Services Transfer Pricing Blog!

Blog 1: Intercompany Financing in the crosshairs

Over the past few years we have witnessed an increase in disputes and litigation dealing with intercompany loans. In the Netherlands, for instance, the focus of the authorities has been on intercompany financing provided in the context of acquisition structures, such as through shareholder loans.

This fits in a trend of tax authorities increasingly challenging the interest deductibility or arm’s length nature of intercompany loans, especially when used in leveraged acquisition structures.

The level of scrutiny of intercompany financial transactions is expected to only increase going forward, and not only in the Netherlands, as a result of the 2020 release of the OECD Guidance on the transfer aspects of financial transactions, but also in response to the Covid 19 pandemic support measures, and resulting push for additional tax income by the authorities.

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Intercompany Financing in the crosshairs

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Blog 2: Transfer Pricing Mismatches in the Netherlands

On 21 September 2021, the Dutch Ministry of Finance published the government’s tax plan for 2022. The plan includes several proposals that are relevant for international companies and Dutch taxpayers alike, not the least important of which is a special provision preventing transfer pricing mismatches when applying the arm's length principle. Deemed deductions in relation to interest or royalties, without a corresponding upward adjustment at the counterparty, will no longer be allowed going forward. Multinationals relying on such set-up thus should act quickly to avoid being caught by these new rules.

In this blog we provide an overview of the new measures related to transfer pricing mismatches and particularly their impact for Dutch financial services companies (“FSC”), effective for financial years starting on or after 1 January 2022.

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Transfer Pricing Mismatches in the Netherlands

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Blog 3: Insurance TP and IFRS 17

The increase of new entrants to the business, some of which non-regulated entities with lower operating costs, the digital era consumer demands as well as the persistency of low interest rates, challenge insurance firms to stay relevant in the new environment. On top of that the implementation of IFRS 17 requires accounting changes in liability valuation and revenue/profitability recognition for insurance contracts which could inadvertently also impact existing transfer pricing policies.

Insurance being a highly specialized industry, up to date tax audits were not always perceived as industry focused. However, as transfer pricing auditors become more industry skilled and the OECD TP Guidance on Financial Transactions (“OECD Guidance”) issued back in February 2020 broadens its application, it is prudent to understand what transfer pricing auditors are looking at now, also considering the increase of appetite to push for additional tax income due to the covid-19 support measures offered by governments.

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Insurance TP and IFRS 17

 

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Blog 4: Financial Guarantees and Intercompany Considerations

When it comes to transfer pricing for intercompany financing, a lot of attention is usually given to loans and cash pool structures, including determining credit ratings. While financial guarantees and their consequences are also quite common in multinational groups, and the transfer pricing considerations are not always clear cut.

In this blog we therefore discuss relevant aspects and takeaways with regard to dealing with financial guarantees for transfer pricing purposes.

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Financial Guarantees and Intercompany Considerations

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Blog 5: Factoring arrangements

Factoring schemes have become increasingly popular as a cash management and working capital optimization mechanism. This popularity has also translated to related-party transactions, where multinational groups are also implementing intercompany factoring schemes in an effort to:

  • Facilitate working capital financing of group affiliates;
  • Optimize the collection of receivables; and
  • If applicable, centralize liquidity, credit and FX risks in selected group companies (i.e. group Factors) with the ability to control and absorb such risks.

Over the past few years, we have witnessed an increased focus of tax authorities on intercompany factoring schemes. In Belgium, for instance, such schemes have been specifically targeted in audit waves since 2017, but have received similar attention and scrutiny across Europe in recent years.

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Factoring arrangements

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Blog 6: Economic substance of Captive Insurance Companies - Why now

The recent OECD Guidance, together with the OECD Forum on Harmful Tax Practices (“FHTP”) and the EU Code of Conduct standards reinforce the idea that the economic substance is under the spotlight of the OECD and local tax authorities. This, added to the perception that Captive Insurance Companies (“CICs”) may facilitate profit shifting based on intercompany agreements, has led to CICs being scrutinized worldwide for tax purposes

Questions such as whether CICs are performing a real economic activity, whether there is substantial income-generating activity taking place in the jurisdiction and/or whether CICs are effectively conducting an insurance business and controlling the related risks – are increasingly being raised by regulators and tax authorities.

In this regard, MNEs should be in the position to evidence that profits attributed to a CIC are supported not only by intercompany agreements and the transfer pricing documentation but also by economic substance.

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Economic substance of Captive Insurance Companies

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Blog 6: Cash pooling and transfer pricing

Cash pool structures are common treasury tools or solutions to optimize the use of and access to liquidity within an MNE. It is an instrument that can help to achieve more effective liquidity management by centralizing credit and debit positions of various accounts into one account (either notionally or physically). As such, following the netting of credit and debit balances, the need for external borrowing can be reduced, effectively optimizing the use of liquidity available in the Group and resulting in lower interest costs for the company on external financing.

Cash pooling is a popular financial instrument for MNE Groups, but does not occur – due to its nature – between independent parties. This makes it inherently difficult to demonstrate that cash pooling arrangements are at arm’s length. Next to that, cash pool structures are commonly not set up for tax purposes but have been exclusively in the domain of the treasury department. However, with tax authorities increasing their understanding of cash pool structures and how to interpret them for tax and transfer pricing purposes, this has been followed by an increased level of scrutiny.

The complexity for transfer pricing purposes arises from the economic and holistic approach applied to the cash pool caused by the fact that these structures are not set up between independent parties. Read about the rights, wrongs and common pitfalls in this blog.

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Cash pooling and transfer pricing

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