With an increase in staffing and resources focused on transfer pricing issues, the IRS has turned its attention to intercompany lending and interest rates.  As highlighted below in a recent BNA article, taxpayers are seeing a sharp increase in cases aimed at intercompany lending arrangements.  Coinciding with the substantial increase in interest rates in recent years and emboldened by an internal legal memo on the topic, IRS exam teams are taking a closer look at the variables taxpayers are using to set related party interest rates.  

The primary point of emphasis is that taxpayers need to take into account a number of factors, similar to third-party financial institutions, when setting intercompany rates such as credit risk, liquidity and subordination, etc.  

Taxpayers who haven’t reviewed their current related party lending agreements within the last few years should reassess those arrangements in light of true third-party lending criteria before the IRS shows up at the company’s doorstep.  

Taxpayers are considering challenges to an IRS position on intercompany lending detailed in a recent legal memo, as cases build and criticism grows. The IRS said in a memo last December that when making loans between affiliates, companies had to factor in implicit support—or the beneficial credit impact of being part of the larger group—when setting the loan rate. For example, if a subsidiary has a credit rating meriting a high interest rate for a loan but its parent merits a low rate, the intercompany loan rate should land somewhere in between.

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