November 30, 2023
IRS reiterates that guidance may be coming on considering implicit support when pricing intercompany loans
Kate Kerrigan, an attorney at the IRS's Office of the Associate Chief Counsel (International), confirmed during a panel at the American Bar Association's virtual conference on October 17, 2023, that the IRS "is heavily considering sub-regulatory transfer pricing" guidance on whether companies must price intercompany debt using a group approach where a parent would support the borrower if a financial need existed (i.e., implicit support).1
Kerrigan previously said during a Practising Law Institute event in March 2023 that the IRS was considering a regulation that would require companies to consider implicit support when pricing intercompany debt (see Tax Alert 2023-0619).
Currently, the US transfer pricing regulations do not expressly require companies to consider implicit support when pricing intercompany debt. At the March 2023 event, however, Kerrigan pointed to passive association language for services (not financial) transactions that would validate the concept of implicit support. While Treas. Reg. Section 1.482-9(l)(3)(v) indicates that a related party does not receive a benefit from merely being a member of a controlled group, Treas. Reg. Section 1.482-9(l)(5), example 16, states that issuing a performance guarantee should be considered a compensable service if it enables an affiliate to secure a contract under materially better conditions than it would have without the guarantee.
Kerrigan also said in March that the IRS was considering regulations that would align with OECD Transfer Pricing Guidelines, which require companies to consider a parent's implicit support when determining interest rates on intercompany loans. Additionally, she emphasized that implicit support guidance would clarify existing law and not qualify as new. The guidance would apply retroactively to all pre-existing intercompany debt and guarantees, without grandfathering.
Taxpayers should remain vigilant about any upcoming guidance, which is likely to substantially impact the way intercompany debt with implicit support is priced. Moreover, the potential retroactive application of the guidance may present difficulties for international financing, possibly leading to conflicts with foreign jurisdictions that may not readily embrace a revised pricing approach for existing transactions.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor
1 ABA Conference: Transfer Pricing Guidance Considered, Daily Tax Report: International (October 17, 2023).