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Transfer pricing rules also apply to financing arrangements so loans between connected companies where one of those companies controls the other, or where both are under common control, are subject to the transfer pricing rules. The transfer pricing legislation takes precedence over the loan relationships legislation.
The same principles of transfer pricing as set out in the UK transfer pricing in practice guidance note apply to financing transactions and additional details and examples are provided in the OECD’s Transfer Pricing Guidance on Financial Transactions which will become part of the main OECD Transfer Pricing Guidelines in due course.
One aspect of transfer pricing for loans is thin capitalisation. A company will be considered to be thinly capitalised, ie it does not have enough capital to support the debt, where:
a loan exceeds the amount which the borrower would or could have borrowed from an independent lender, or
the terms of the loan differ from those that would have been agreed with such a lender, eg a higher interest rate
TIOPA 2010, s 152; INTM413200
Where thin capitalisation occurs, the interest on the excessive part of the loan will be disallowed as a deduction in arriving at the assessable profits or allowable losses of the borrower. See Example 1.
Transfer pricing can also apply to loans from the position of the lender; for
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