When companies which belong to the same multinational enterprise undertake transactions with each other, they are not subject to the same market pressures which exist in case of transactions undertaken between independent enterprises. Hence international tax law prescribes the application of the arm’s length principle (ALP): for tax purposes the terms of controlled transactions must accord with the terms which (would) have been agreed between independent enterprises in comparable circumstances.
The study analyses how the OECD, the EU and selected countries apply the ALP to intra-group financial transactions and how the ALP can best be applied to these transactions.
The study’s comparative component shows that uncertainty exists as to the appropriate application of the ALP to intra-group financial transactions because countries’ pre-2020 administrative guidance and case law are not fully aligned with each other and OECD guidance published in 2020 in part lacks specificity and clarity.
The study’s normative component shows that the ALP is ill-suited to determine the tax consequences of intra-group financial transactions because it is impossible to apply what constitutes a theoretically correct application of the ALP in general to intra-group financial transactions. The study further argues that the ‘group credit rating approach’ constitutes the preferable (‘second best’) approach to determining arm’s length terms for intra-group financial transactions, that is arm’s length terms are to be determined on the basis of the credit rating of the group to which the borrowing group company belongs.