Transfer pricing of intragroup financial transactions:
new times, new challenges

In this alert we comment on the application of transfer pricing rules for intragroup financial transactions in the current economic environment and set out our recommendations for further action.

Intragroup financial transactions in the context of volatile global markets and economic restrictions

In the second quarter of 2022 the global economy encountered new challenges which required Russian multinational enterprise groups (MNE groups) to make rapid decisions aimed at rebuilding global supply chains and creating value in various sectors of the economy. Moreover, the changes have prompted the need for MNE groups to modify their legal and organisational structures to accommodate the expansion of operations into new markets in Asia, Africa, South America and Arab countries.

The nature of these transformational processes has also been shaped to a large degree by the unfriendly economic measures imposed by a number of states and by measures to safeguard the financial stability of the Russian Federation[1], which have created a new legal and regulatory context for cross-border financial transactions and arrangements.

As companies adapt to the changed environment and enter new markets, they have an increasing need to secure financing from both unrelated and related entities in order to ensure the continuity of their activities.

It is therefore essential, when planning and executing new intragroup financial arrangements between MNE group members operating in different countries, to take all the above factors into account and comply with the TP rules in all countries in which the MNE group members do business.

The volatile state of commodity and financial markets means that tax authorities are especially focused on enforcing transfer pricing rules, since every country’s tax authorities want to secure control over the tax base that is created in their country based on the prices of intragroup financial transactions.

In order to comply with TP legislation in Russia and in foreign jurisdictions, therefore, it is extremely important to consider global economic trends and the requirements of local TP legislation in relation to intragroup financial arrangements such as credits and loans, guarantees and sureties, and others. The requirements in question need to be considered both in relation to controlled transactions concluded in prior tax periods and in relation to planned transactions.

Price information sources and databases

Among the difficulties currently faced in ensuring that the prices and conditions of intragroup financial transactions comply with the requirements of TP legislation are the restriction of access of Russian taxpayers to the databases of the Bloomberg and Refinitiv price reporting agencies – the chief providers of price information for financial transactions in Russia and abroad, and the suspension of operations in Russia by international rating agencies, which provided access to calculators used to determine the credit ratings of related counterparties.

It has become a matter of urgency for taxpayers to gain access to alternative information sources and databases which may be used to determine the market level of prices and fees in controlled financial transactions for transfer pricing purposes.

On 29 April 2022, the Board of Directors of the Bank of Russia adopted a Decision[2] to the effect that, in determining the prices (value) of financial instruments, credit and non-credit financial organisations may, in addition to information published by the Bloomberg and Refinitiv agencies, use information provided by:

• NKO NRD AO
• Interfax AO (one of Interfax’s projects in partnership with NRD is the RU Data platform)
• Sbons.ru OOO, or
• If the required information is not available from the above sources, information provided by other organisations based on a reasoned decision of the relevant credit or non-credit financial organisation.

Although the Decision contains recommendations for financial organisations, the information sources may also be used by non-financial organisations that enter into intragroup financial transactions if they contain relevant information about comparable financial transactions.

In reply to an inquiry from the National Financial Association self-regulatory organisation (NFA SRO)[3], the Bank of Russia likewise confirmed that the above-mentioned Decision could be used as guidance for tax compliance purposes, and specifically in determining the reference prices (values) of non-traded securities (derivatives) in accordance with the provisions of regulatory acts for the purposes of Chapter 25 of the Tax Code.

In its Decision the Bank of Russia also asserts that other information may be used on the basis of a reasoned decision of the company concerned. In our view, such sources might include the following:

• NFA SRO
• Individual brokers (pricing data of market contributors)

Databases of local providers of financial information are currently being loaded with information on over-the-counter financial transactions concluded by Russian companies on the Russian market, meaning that the volume of information that can be used in determining the market level of prices is also increasing.

Furthermore, the suspension of Russian operations by international rating agencies and the ensuing restriction of access to those companies’ information products for Russian taxpayers has made it particularly crucial to identify alternative sources and methods for calculating the credit ratings of related entities which are members of MNE groups.

For instance, ACRA and Expert RA assign credit ratings to various categories of issuers and issued products (banks and other financial institutions, corporate sector organisations) and are developing special credit analysis solutions for the determination of credit ratings that can be used to assess the market price level for controlled financial transactions.

Taxpayers can also use updated TP methodologies to prove the arm’s length pricing of intragroup financial transactions occurring within Russia which are not classed as controlled for TP purposes if the tax authorities carry out audits to check for unjustified tax benefits in line with the provisions of Article 54.1 of the Tax Code.

In addition, TP methodologies can be used by taxpayers in non-tax-related economic disputes to demonstrate the arm’s length nature of interest rates and fees set in intragroup financial arrangements such as shareholder loans and subordinated loans in the context of various forms of public private partnership (PPP).

What action is advised?

In the current economic environment, we recommend considering the following lines of action in relation to intragroup financial transactions to ensure compliance with TP regulations in Russia and in all jurisdictions where an MNE group has a presence:

• Analyse all intragroup financial transactions between all MNE group members operating in different countries, including both transactions in prior periods and planned transactions.
• Analyse alternative information sources to determine whether comparable financial transactions exist and secure access to optimal price information sources and solutions for determining the credit ratings of related counterparties.
• Make appropriate amendments to TP methodologies regarding the determination of credit ratings and the determination of market prices for intragroup financial transactions.
• Carry out sample testing of updated TP methodologies to ensure that they are workable and effective.
• Carry out benchmarking studies for intragroup financial transactions in past periods, prepare local files and/or benchmarking study reports for all countries in which member companies of the MNE group are present and ensure that the pricing terms of future intragroup financial transactions are consistent with the market level.
• Pay particular attention to financial transactions which took place in prior periods but for which benchmarking studies were not carried out, since the testing of such transactions for compliance with the arm’s length principle should have been done primarily using Bloomberg and Eikon Refinitiv data, access to which is now restricted for Russian MNE groups.
• Analyse the actual circumstances of non-controlled intragroup financial transactions and identify circumstances which might prompt the tax authorities to investigate the possible receipt of unjustified tax benefits by the parties to the transaction. Having carried out that analysis, prepare a solution to mitigate the identified risks, i.e., prepare TP documentation and/or a defence file describing the actual circumstances of the transactions and demonstrating that the transactions are priced at arm’s length.
• Consider the possibility of restructuring intragroup financial transactions if restrictions have made it impossible or difficult to service obligations emanating from those transactions.