Cross-Border Financial Transactions and Arm’s Length Interest Rates: A Two-Step Approach

Abstract

Financial transactions between related parties are often scrutinized in tax audits. In order to analyse whether the conditions (transfer prices) underlying these transactions, in particular regarding intercompany loans, are appropriate from a tax point of view, they have to be in line with the arm’s length principle. Given this, there is a substantial burden for the taxpayer as there are no precise regulations on how the arm’s length prices are to be determined, neither on a national nor on an international level. Subject of this article is to discuss cross-border financial intra-group transactions by taking into account economic as well as administrative reasoning. Basing on this discussion, a two-step approach is developed which combines the two pillars by providing an indication on how arm’s length prices could be determined on the one hand while also focusing on administrative issues on the other hand. This two-step approach could be applied to any kind of financial transactions.