The OECD Guidelines and the UAE Transfer Pricing Guidelines specifically describe the transfer pricing implications on intragroup loans. Transfer pricing involves setting up the prices of products, services and intangibles transferred between the associated enterprises of an MNE group located in different tax jurisdictions.
The prices should meet the arm’s length standard, which means the transactions must be priced as if they were carried out between unrelated parties in an open market. This means you will be required to determine the arm’s length range of intragroup loans as well.
Companies in the UAE can use the Transfer Pricing Guidelines (CTGTP1) released by the Federal Tax Authority (FTA) for determining the arm’s length range of intragroup loans. Transfer pricing consultants in Dubai can further assist you in this process. Read the below blog to learn about determining the arm’s length range of intragroup loans:
What are intragroup loans?
Even though intra-group loans are often made by a central treasury entity, they can also occur in certain other scenarios as well. For example: loans from a parent company to an operating subsidiary, loans between operating subsidiaries, or shareholder loans made by investors to portfolio companies.
If the loan is provided by a centralised treasury entity, it should be priced separately from the routine services that may also be performed by that entity. You can seek the advice of transfer pricing advisers in Dubai for such transactions.
Appropriate Transfer Pricing Method for Intragroup Loans
The UAE Transfer Pricing Guide recommends the Comparable Uncontrolled Price (CUP) method for determining the arm’s length pricing of intragroup loans. The CUP method is considered the most appropriate transfer pricing method for intragroup loans due to the abundance of data on third-party loans.
Applying the CUP Method on Intragroup loans
For loan transactions, the CUP method typically involves the following steps:
- Analysis of the terms of the loan relating to factors that may impact the pricing including issue date, tenor, country of the borrower, currency, options (for example, pre-payment option), interest rate type (for example, fixed vs. floating), etc.
- Analysis of the borrower’s credit rating to understand the credit risk borne by the lender in extending the loan
- Search for third-party loans with a similar credit rating and terms
- Comparability adjustments if necessary and the calculation of the arm’s length range
Understanding Credit Rating for Intragroup Loans
Credit rating is an opinion about a company’s general creditworthiness and its ability to meet its financial obligations.
Based on prevailing facts and circumstances and provided there is comparability between the third-party debt issuance and the Controlled Transaction when both MNE credit rating and financial instrument credit ratings are available, the rating of the particular financial instrument would be more appropriate to be used to price the controlled financial transaction.
The MNE Group must appropriately document the reasoning behind the credit rating used when pricing intra-group loans and other controlled financial transactions.
Performing a search for third-party loans
MNEs can benchmark the arm’s length interest rate for an intra-group loan against publicly available data for other borrowers/third-party loans with the same credit rating as well as sufficiently similar terms and conditions and other comparability factors. Apart from credit quality, the following factors must also be considered while performing a search for third-party loans:
- The issue date of the loan
- The currency of the debt
- The country of the borrower
- The tenor of a loan
- The options for a loan
- Different types of rates may be applied to loans
- The industry of the borrower
Tax Gian can Advise you on the Pricing of Intragroup Loans
When intragroup loans are involved, MNEs need to consider the implication of transfer pricing. This blog highlights the key transfer pricing aspects of intragroup loans relevant to MNEs in the UAE. However, entities may find it tough to determine the arm’s length pricing of intragroup loans.
This is where the expertise of the best transfer pricing consultants in Dubai such as Tax Gian come in handy for you. Tax Gian, a brand of Jitendra Tax Consultants (JTC), is one of the leading transfer pricing advisers in Dubai. We have a team of highly qualified tax experts who can guide businesses on all aspects of the UAE transfer pricing regulations. Call us today to avail yourself of comprehensive transfer pricing advisory services in the UAE.