Cross-Border Lending of Related Parties Requires Attention be Given to Transfer Pricing and Earnings Stripping Rules
By Anthony Diosdi Cross-border lending is a common business practice with groups of related corporations. However cross-border lending requires attention be given to the transfer pricing and earnings stripping rules. The Internal Revenue Service (“IRS”) has broad powers to recharacterize “any multi-party financing transaction as a transaction directly among any two or more of such parties where the Secretary determines such recharacterization is appropriate to prevent the avoidance of any tax imposed by this title.” See IRC Section 7701(1). We will begin our discussion with a look at how the transfer pricing rules impact cross-border lending.Transfer Pricing Rules for Cross-Border Lending of Related PartiesFor transfer pricing purposes, controlled entities generally must charge each other an arm’s length rate of interest on any intercompany loans or advances. See Treas. Reg. Section…