Loans, borrowings, guarantees and cash pooling
The TCRT does not establish a methodology for verifying the arm’s-length level of the prices of loans, borrowings, guarantees, cash pooling and other financial transactions (financial lease: leasing, factoring and forfeiting) for tax purposes.
We also note that, pursuant to Article 230 of the TCRT, if a loan issued or guaranteed by one party exceeds 50% of the book value of the other party’s total assets, the parties are deemed related parties for tax purposes, and, consequently, if other requirements of part 1 of Article 225 of the TCRT are met, transactions between these parties must comply with the TP Rules.
Therefore, it may be assumed that, for purposes of verifying the arm’s-length level of prices in these transactions, the Comparable Uncontrolled Price method (hereinafter, CUP) will be most appropriate, corresponding to international practice in the TP sphere. At the same time, it does not contradict the arm’s-length principle stipulated in the TCRT, which applies in accordance with international TP standards.
When performing benchmarking studies of arm’s length of prices established in such transactions and identifying comparable transactions, taxpayers should be guided by the general principles for concluding arm’s-length agreements stipulated in Article 226 of the TCRT.
In verifying the arm’s-length nature of agreements in accordance with international practice, one of the key parameters impacting the interest rate or remuneration of the parties to a financial transaction will be the credit rating
, which, in its turn, reflects the credit history and solvency of borrowers and principals of bank guarantees.
Various tools and methods may be used for purposes of establishing credit ratings, e.g.:
- Information about the credit rating assigned to a borrower by rating agencies (e.g., S&P, Moody’s, Fitch, Expert RA, ACRA and other)
- Methodologies of international rating agencies
- Analytic tools in the databases of information and price agencies or on the platforms of international rating agencies, e.g., PVTCO Calculator, developed by Refinitiv Eikon for calculating a company’s credit rating on the basis of its financial indicators; Moody’s RiskCalc by Moody’s Analytics, which provides for assessing a borrower’s indicative stand-alone credit rating on the basis of its financial indicators, industry and country; S&P technological solutions on the S&P CAPITAL IQ platform (e.g., CreditPro, CreditModel and PD Model), providing for the assessment of a borrower’s credit rating using quantitative methods of solvency assessment
- In-house methodologies of multinational groups of companies for the assessment of credit ratings
In order to obtain information essential for identifying comparable transactions and determining the arm’s-length ranges of interest rates and fees, taxpayers may use the databases of international information and price agencies
, such as Refinitiv Eikon and Bloomberg, as well as regional databases
, such as Cbonds.
When verifying the arm’s-length level of transfer prices in financial transactions, taxpayers must take into account the provisions of articles 194 and 224 of the TCRT—in particular, those regulating the deduction of interest expenditures:
- A taxpayer may deduct actually paid interest for every loan in the period under review, but no more than triple the amount of interest accrued (subject to accrual) using the NBT refinance rate effective in the tax period. This restriction applies to interest payments under financial lease agreements, among other things.
- The maximum amount of interest expenditures is also assessed in compliance with thin capitalization rules, under which, if the ratio of average credit to average authorized capital exceeds two, the permitted interest deduction in the period is restricted.
Based on the above, one can set out the following procedure of analyzing interest rates for purposes of transfer prices in financial transactions:
1. Determination of the arm’s-length ranges of interest rates on the basis of a TP method
2. Comparison of the results of a benchmarking study with the TCRT’s requirements concerning the adjustment of interest expenditures with respect to:
- restriction in terms of the refinance rate
- compliance with thin capitalization rules
Under the TCRT, taxpayers must also draft documents confirming the arm’s-length nature of transactions carried out by a taxpayer under a transfer pricing agreement. The documentation should include the basis for using a TP method(s).
The tax authority, in coordination with the authorized government agency in the financial sphere, may establish requirements for simplified TP documentation for the following taxpayers and certain types of transactions:
- Taxpayers with a low volume of transborder operations
- Medium-size business entities
- Intragroup services
- Provision of loans
- Technical services
At the same time, under part 6 of Article 229 of the TCRT, simplified rules of TP documentation do not apply to royalty, licensing fees, R&D agreements and other intangible assets..