Rules to Determine Arm’s Length Remuneration for Treasury Function
The UAE Transfer Pricing Guide provides a detailed explanation of the transfer pricing aspects of certain financial transactions such as the treasury function. The key objective of the treasury function within an MNE group is to monitor and ensure financial stability.
MNE Groups establish dedicated treasury departments to manage and address the liquidity and financing needs of the Group. However, the MNE groups need to have proper guidance on determining whether the conditions for such transactions between Related Parties or Connected Persons are consistent with the Arm’s Length Principle.
Transfer pricing advisers in Dubai can help the MNE groups determine whether the treasury function transactions are meeting the arm’s length standard. Read ahead for more insights on the rules to determine arm’s length remuneration for treasury functions.
What is Treasury Function?
Typically, the treasury function is part of the process of optimizing the financing of the commercial business of the MNE group. In line with this, the treasury function usually serves as a support service to the main value-creating operation. For example, the services provided by a cash pool leader.
Understanding Treasury Activities
Treasury activities carried out within MNE groups are treated as transactions between Related Parties or Connected Persons and are subject to Transfer Pricing requirements. A corporate treasury department usually performs the following activities for the benefit of the group:
· Optimizing liquidity across the Group so that the business will have adequate cash available in the right currency when needed. Sometimes, a central treasury team may act as the contact point to centralise the external borrowing of the MNE Group. External funds would then be made available within the MNE Group through intra-group lending
· Cash management of the excess liquidity of the MNE Group in order to earn an investment return and preserve capital as needed.
· Managing financial risk through identification and analysis of, and responses to, the financial risks to which the business is exposed, including optimising the cost of capital to the advantage of the users of the MNE Group’s treasury services
· Raising debt (through bond issuances, bank loans or otherwise) raising equity, and managing the relationship with the MNE Group’s external bankers and with independent credit rating agencies
Transfer Pricing of Treasury Activities
While evaluating the transfer pricing aspects of treasury activities, entities must accurately characterise and understand the actual transactions and determine what exactly the treasury functions that an entity is carrying out are before moving on to the pricing of the transactions. It is advisable to seek help from the best transfer pricing consultants in Dubai in such scenarios.
Arm’s length of central treasury function
If a central treasury function is performing routine services without bearing or managing significant risks, the guidelines related to Intragroup Services apply.
Arm’s length of in-house treasury function
Taxable persons must separately consider the arm’s length remuneration for cases where the treasury function is acting as an in-house bank that is bearing and managing significant contingent liability risk that may arise from Related Party loans, cash pooling or guarantees.
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