The case concerned the income tax return of Monómeros Colombo Venezolanos, a company based in Colombia. Following an audit the tax authorities had increased its reported income and disallowed deductions for interest on loans from its related company, Monómeros International Ltd., located in the British Virgin Islands. The authorities argued that Monómeros’ transfer pricing documentation was deficient because it relied exclusively on foreign comparables and disregarded domestic comparables, which they considered more appropriate. They also rejected the comparables used to support the intercompany financing, which had been based on United States corporate bonds, finding them not sufficiently similar to the actual transactions. In an appeal Monómeros argued that the adjustments ignored OECD guidelines, did not include proper comparability adjustments, and failed to account for market conditions and risks. The company maintained that its documentation proved that the transactions were consistent with the arm’s length principle, and that it had neither omitted income nor claimed improper deductions. Judgment The Supreme Administrative ... Read more

Credit risk refers to the risk of loss resulting from the inability of cash pool members with debit positions to repay their cash withdrawals. From the cash pool leader’s perspective, there needs to be a probability for it to incur losses derived from the default of cash pool members with debit positions to bear the credit risk. Therefore, an examination under Chapter I guidance will be required to determine, under the specific facts and circumstances, which entity within the MNE group is exercising control functions and has the financial capacity to assume the credit risk associated with the cash pool arrangement ... Read more

Credit risk for the lender is the potential that the borrower will fail to meet its payment obligations in accordance with the terms of the loan. In deciding whether a prospective loan is a good commercial opportunity, a lender will also consider the potential impact of changes which could happen in economic conditions affecting the credit risk it bears, not only in relation to the conditions of the borrower but in relation to potential changes in economic conditions, such as a rise in interest rates, or the exposure of the borrower to movements in exchange rates ... Read more

A second example relates to the purported transfer of credit risk as part of a business restructuring. The analysis under Section D. 1.2.1 of Chapter I would take into account the contractual terms before and after the restructuring, but would also examine how the parties operate in relation to the risk before and after the restructuring. The analysis would then examine whether the party that contractually assumes the risk controls the risk in practice through relevant capability and decision-making as defined in paragraph 1.65 and has the financial capacity to assume such risk as defined in paragraph 1.64. It is important to note that a party that before the restructuring did not assume a risk under the analysis of Section D. 1.2.1 of Chapter I cannot transfer it to another party, and a party that after the restructuring does not assume a risk under the analysis of Section D. 1.2.1 of Chapter I should not be allocated the profit potential ... Read more

Credit risk refers to the risk of loss resulting from the inability of cash pool members with debit positions to repay their cash withdrawals. From the cash pool leader’s perspective, there needs to be a probability for it to incur losses derived from the default of cash pool members with debit positions to bear the credit risk. Therefore, an examination under Chapter I guidance will be required to determine, under the specific facts and circumstances, which entity within the MNE group is exercising control functions and has the financial capacity to assume the credit risk associated with the cash pool arrangement ... Read more

A second example relates to the purported transfer of credit risk as part of a business restructuring. The analysis under Section D. 1.2.1 of Chapter I would take into account the contractual terms before and after the restructuring, but would also examine how the parties operate in relation to the risk before and after the restructuring. The analysis would then examine whether the party that contractually assumes the risk controls the risk in practice through relevant capability and decision-making as defined in paragraph 1.65 and has the financial capacity to assume such risk as defined in paragraph 1.64. It is important to note that a party that before the restructuring did not assume a risk under the analysis of Section D. 1.2.1 of Chapter I cannot transfer it to another party, and a party that after the restructuring does not assume a risk under the analysis of Section D. 1.2.1 of Chapter I should not be allocated the profit potential ... Read more

The transaction in question was an intra-group loan agreements that had been entered into by “Lender S.A.” under the following conditions: an amount of €47,665,500, a term of 10 years, and a fixed annual interest rate of 13%. The loans allowed early repayment only at the discretion of the borrower without penalties, and interest was calculated on the outstanding amount​. The tax authorities’ had issued an assessment of additional corporate income tax for FY 2012 and 2013, after finding that the loan did not adhered to the arm’s length principle and lowering the interest rate to 5.6%. The adjustment resulted from the exclusion of the 7.4% risk component from the fixed interest rate, since according to the tax authorities, implicit support eliminated the additional risk in relation to the loans. Judgment of the Tribunal The Tribunal determined that the interest rate of 13% complied with the arm’s length principle ruled in favor of “Lender S.A.”. The decision centered on verifying ... Read more