IRS Empowered to Consider Corporate Group Membership in Intragroup Loan Interest Rates, Legal Memorandum Suggests

The Internal Revenue Service (IRS) in the United States may now consider a company's membership within a corporate group when determining the interest rate applicable to an intragroup loan provided to the firm, according to a legal memorandum released on December 29. The memo, issued by the IRS Office of Chief Counsel on December 19, offers non-taxpayer-specific legal advice on the application of Section 482 of the US Internal Revenue Code.

Section 482 of the US tax code outlines transfer pricing (TP) rules, which require related companies to engage in transactions with each other on an arm's-length basis. The recent memorandum specifically addresses the question of whether the IRS has the authority to take into account group membership when establishing the arm's-length rate of interest for intragroup loans and making adjustments under Section 482.

The memorandum clarifies that, according to Section 482 regulations, the arm's-length rate of interest for an intragroup loan to a controlled borrower is generally determined by the rate at which the borrower could realistically secure alternative financing from an unrelated party. Therefore, if an unrelated lender would consider group membership when setting financing terms for the borrower, and such third-party financing is realistically available, the IRS has the discretion to adjust the interest rate in a controlled lending transaction to reflect group membership.

As an example, the memorandum suggests that the IRS may make adjustments to interest rate charges in loans between sister subsidiaries of a corporate group based on an agency credit rating of the borrower. However, the memo explicitly notes that the advice contained within should not be used or cited as precedent.

This development underscores the IRS's willingness to take a nuanced approach in determining the arm's-length pricing of intragroup transactions, considering factors such as group membership in line with external market practices. It marks a noteworthy move in tax regulation, potentially impacting how companies structure intragroup financing and lending arrangements.

Notably, this comes amid a high-profile tax dispute between the IRS and Microsoft, primarily centered around transfer pricing. The IRS has claimed that Microsoft owes $28.9 billion in back taxes for the period between 2004 and 2013, along with penalties and interest, with the company publicly announcing the dispute on October 11.

By fLEXI tEAM