How do companies price intercompany loans in, and from, China, especially when these are part of a cash pooling arrangement? The main concern here is tax, and participants are finding their tax departments are becoming more involved in this question .
The report is based on a Treasury Peer Call which took place on 13th March 2021.
The call was expert chaired by Damian Glendinning, whose commentary appears below.
This report was produced by Monie Lindsey.
China will continue to provide employment to treasurers for a long time to come. As always, cash pooling and cross-border intercompany loans are a good story: it is possible to do most things. But, as usual with China, there are complexities and unresolved issues.
The main topic of the call was how to price intercompany loans in, and from, China, especially when these are part of a cash pooling arrangement. The main concern here is tax, and participants are finding their tax departments are becoming more involved in this question. It is also clear that there is a move – and not just in China – for authorities to become more aggressive in requiring full arm’s length pricing. Taken to its extreme, this can require the application of an interest rate which takes into account the credit rating of each individual entity, and the separate application of a charge for any guarantees, either explicit or implied.
Historically, the Chinese tax authorities have not been aggressive in challenging transfer pricing methodologies. Several participants reported questions from the authorities, but no actions so far. Having said this, people are nervous because:
Against this background, some participants are adopting approaches which more closely follow market pricing. Many have used a simple 3% interest rate for many years – this has never been challenged.
Bottom line: if you aren’t already close friends with your tax department, you soon will be!
For reference, I attach links to a couple of articles which discuss the question, but which leave room for interpretation:
CMS Law-Now: An overview on cash pooling in China
Deloitte tax@hand: PBOC reforms calculation of loan prime rate