Transfer pricing paper
Implicit support:Analysis of case law in countries such
Canada, Australia and the Netherlands.
Implicit Support in Intra-Group Loans: Evaluating Consistency with the core goal
of the Arm's Length Principle and Evaluating its Relevane
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,Table of contents
Chapter 1 – Introduction ........................................................................................................3
1.1 Introduction of the topic...........................................................................................................3
1.2 Motivation and Research Question...........................................................................................4
Chapter 2 –Defining “Implicit Support” ...............................................................................6
2.1 Meaning Of Implicit Support: ..................................................................................................6
2.2 Implicit Support vs Explicit Guarantee…..................................................................................7
Chapter 3 – Establishing The Benchmark -The Objective of the Arm’s Length
Principle-...................................................................................................................................8
3.1 The Traditional Perspective On The Arm’s Length Principle:………………………………….8
3.2 Beyond The Traditional Arm’s Length Principle And The Separate Entity Approach: …………..8
Chapter 4 – Case Law Analysis: Perspectives on the Relevance of Implicit Support ….10
4.1 OECD Guidelines On Implicit Support: ……………………………………………………..10
4.2 Canada’s Position On Implicit Support: The GE Capital Case……………………...…………..10
4.3 Australia’s Position On Implicit Support: The Chevron Case…………………………………..12
4.4 The Netherlands’ Position On Implicit Support:………………………...………………….….13
Chapter 5- Evaluating the Alignment of Implicit Support with the Objective of the Arm’s
Length Principle ………………………………………………………………………………15
5.1 Implicit Support Alignment with the Objective of the Arm’s Length Principle …………………….15
Chapter 6: Summary and Conclusion ………………………………………………………..17
6.1 Summary of the Research conducted and Claim of the paper ………………………………………..17
References………………………………………………………………………………………18
List of Abbreviations……………………………………………………………………….…….23
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, Chapter 1: Introduction
1.1 Introduction of the topic
In recent years, governments, non-governmental organizations, and the general public have turned their
attention to the taxes of multinational corporations (MNEs) (Lohse et al., 2014). MNEs are crucial players
in global value chains (Cai et al., 2023), contributing to roughly 32% of the world’s GDP (Cadestin et al.,
2018). Their economic importance is underscored by the fact that in 2021, over $11 trillion was generated
in revenue by the top 100 MNEs, which is equal to the summed GDP of Germany, France, Italy, and
Spain (Oecdstatistics, 2023).
As MNEs expand their international presence, their need to efficiently allocate capital and manage risk
across borders grows (Bakker & Levey, 2012). One possible way to achieve this is through intra-group
financing transactions, such as guarantees, loans, and intercompany cash pooling agreements (Nexdigm
(SKP), 2021). According to the Finnish Tax Administration (n.d.), these transactions allow MNEs to
manage liquidity, reduce borrowing expenses, and optimize their financial structure. However, they can
play a significant role in shaping an MNE’s tax strategy, potentially allowing for tax base erosion and
profit shifting (Nexdigm (SKP), 2021).
Within this context, the concept of “implicit support” has emerged as a crucial consideration in transfer
pricing. The term “implicit support” describes the indirect advantage a company in a group receives just
by virtue of being part of the group, allowing it to benefit from more favorable borrowing conditions,
such as lower interest rates on intra-group loans (OECD,2022, Chapter X, Section C.1.1.3.; Intra-group
Financial Transactions And The Arm’s Length Principle: A Comparative And Normative Analysis, 2022,
Chapter 9). While the OECD’s recent guidance on financial transactions (Chapter X of the OECD
Transfer Pricing Guidelines 2022) attempts to provide some clarity on implicit support, it does not clarify
all the issues revolving around it, leaving jurisdictions to individually interpret and implement its
relevance and usage (Daba, 2020).
This inconsistency has led to different tax treatments and increasing ambiguity in transfer pricing
practices (Daba, 2020). A central question in these debates is whether recognizing implicit support
upholds the core goal of the arm’s length principle or contradicts it by challenging its reliance on the
separate entity approach. Landmark cases and discussions in countries such as Canada, Australia, and the
Netherlands further highlight the complexities surrounding this issue, particularly in determining arm's
length interest rates for intra-group financial transactions (Intra-group Financial Transactions And The
Arm's Length Principle: A Comparative And Normative Analysis, 2022; Mazars, z.d.).
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