ICC concerned about taxation on transactions within business groups

          • Paris, 22 September 2004

          Intra group financing is an important part of the efficient use of the financial resources of an enterprise. Several governments have, however, recently shown a more aggressive attitude with regard to the taxation of interest payments within business groups with a focus on cross-border payments. ICC finds some of those developments worrisome, since they considerably increase the risk of international double taxation and create additional compliance burdens for international business.

          ICC concerned about taxation on transactions within business groups

          ICC expresses its concerns in a three-page statement. It includes the following recommendations for a fair and neutral tax treatment of intra group financing.

          The paramount importance of the arm's length principle.

          As a general rule, interest payments, as long as they are at arm's length (i.e. correspond to what could be agreed to by mutually independent parties), should be treated as such by the countries involved, even if the debt to equity ratio would exceed "thin capitalization" ceilings. The OECD Transfer Pricing Guidelines offer sufficient support to determine whether or not the remuneration for capital is at arm's length.

          Interest payments, as long as they are at arm's length, should be accepted as deductible for tax purposes.

          This principle should apply even if the debt-to-equity ratio exceeds existing thin capitalization ceilings.

          A secondary test should be possible by way of a safe harbour mechanism.

          This test should, however, only serve as a safety net and not as the primary rule.

          The introduction of a worldwide ratio test would pose serious risks for the proper application of the arm's length principle.

          Intra group financing limitations should not be extended to purely domestic transactions.

          EU Member States (and other countries) should refrain from using such a solution as a way to formally comply with the requirements of the European Court of Justice.

          Documentation requirements on transfer pricing should not be extended to intra group transactions.

          ICC considers any such development as a hindrance to a proper and business-oriented structure for corporate activities. The costs associated with such requirements would unduly hamper investment activities.

          The statement has been presented to the Organization for Economic Cooperation and Development, United Nations, The World Bank, International Monetary Fund, International Fiscal Association and the European Commission.

          ICC welcomes work recently undertaken by the OECD on this important subject and hopes that practicable and fair solutions will be found in close cooperation with the international business community.

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