Valuation of Intragroup Financial Transactions in Costa Rica according to OECD guidelines

By Gabriela Páez

In recent years, intragroup financial transactions have become a major focus of attention in transfer pricing. Operations such as related-party loans, financial guarantees, and cash-pooling arrangements, which were traditionally documented using general criteria, are now subject to more technical analysis by tax authorities.

This change reflects the evolution of the OECD Transfer Pricing Guidelines, which incorporated specific criteria for these types of transactions in 2022 and are currently used as a reference in tax audits and reviews in Costa Rica. In practice, it is no longer sufficient to have formal contracts or apply rates considered “reasonable”; now it is required to demonstrate that the agreed-upon terms substantially reflect what would have occurred between independent parties under comparable circumstances.

This article analyzes how intragroup debt, financial guarantees, and cash-pooling schemes are currently valued, with an emphasis on the Costa Rican context. It addresses the main applicable technical criteria, tax risks, current documentation requirements, and common examples faced by business groups.

Current OECD criteria for intragroup financial transactions

The inclusion of specific guidelines for intragroup financial transactions in the OECD Transfer Pricing Guidelines marked a significant shift in their treatment. Based on these criteria, the assessment of such transactions moved from focusing exclusively on their contractual form to focusing on their economic and financial substance.

In this context, the OECD establishes clear technical guidelines that are now crucial in audits and reviews of transfer prices, particularly in the following aspects:

Accurate loan delineation

Each transaction must be analyzed to determine whether it essentially qualifies as a market-value loan or whether, due to its characteristics, it more closely resembles an equity contribution. This analysis assesses factors such as the existence of a formal contract, a defined term, a payment schedule, the borrower's actual repayment capacity, and the parties' actual behavior throughout the transaction.

When these elements are not present or are not met in practice, the transaction may cease to be considered a genuine debt under the arm's length principle, exposing the taxpayer to tax reclassifications and relevant adjustments.

Determination of arm's length interest rates

Setting interest rates today requires robust financial backing. The Guidelines emphasize the need to assign an internal credit rating to the borrower, based on its financial situation, debt level, and cash flow generation capacity, as well as considering, where appropriate, the implicit backing derived from belonging to a multinational group.

Based on this risk profile, market comparables for debtors with similar characteristics, in the same currency and term, should be used to demonstrate that the agreed rate reflects conditions that an independent lender would accept.

Intragroup guarantee benefit analysis

In the case of financial guarantees, the OECD explicitly introduces the criterion of measurable economic benefit. To justify charging a fee, it must be demonstrated that the guarantee generates a tangible improvement in the debtor's financing conditions, such as a reduction in the interest rate or greater access to credit.

When the guarantee does not substantially alter the conditions that the debtor would obtain on his own, for example, when the creditor already implicitly assumes the backing of the group, his remuneration might not comply with the arm's length principle.

Cash-pooling policies under the arm's length principle

Cash-pooling is a centralized treasury management scheme whereby companies in the same group share their surpluses and liquidity needs, allowing some entities to temporarily place their cash surpluses while others use them to cover deficits, usually through a common account or structure managed by an entity in the group.

From a transfer pricing perspective, the OECD states that in these types of schemes, it must be demonstrated that no participating entity is worse off than it would be if it operated independently. This implies that the conditions applicable to the contributions and uses of funds, as well as the distribution of benefits derived from centralizing liquidity, must reflect outcomes aligned with comparable market alternatives.

Intragroup loans: delimitation and rates arm's length

In the case of loans between related parties, these criteria reinforce the importance of proper delimitation from the outset. An intragroup loan must be duly documented through a contract that establishes the amount, term, interest rate, and payment schedule. When these elements do not exist or are not met in practice, the Tax Administration may question the nature of the transaction.

Practical example:

A Costa Rican company receives USD 5 million in funds from its foreign parent company without a formal contract, interest payments, or principal amortization for several years. Under current criteria, the Tax Authority could conclude that no actual debt exists, reclassify the transaction as capital, and reject the interest deduction or impute a presumed return at market value.

Regarding the interest rate, the OECD requires proof that it is equivalent to what an independent lender would have charged under comparable circumstances. To this end, internal rating analysis and the use of market comparables become central elements of the documentation.

Intragroup guarantees: benefit and remuneration

In intragroup financial guarantees, the analysis focuses on determining whether there is a real economic benefit for the guaranteed entity. The valuation typically uses the interest savings method, comparing the rate with and without the guarantee, or comparable market transactions.

Practical example:

If a subsidiary in Costa Rica obtains a bank loan at a rate of 6% thanks to an intragroup guarantee, when comparable companies without a guarantee pay around 8%, that difference represents the economic benefit attributable to the guarantee and defines the reasonable limit of the arm's length commission.

Cash-pooling: arm's length profit distribution

In cash-pooling schemes, the main challenge is to demonstrate that internal rates and profit allocation reflect market conditions.

Practical example:

If a Costa Rican entity contributes surplus funds to the pool and receives a lower return than it would obtain in the market, or if it uses funds from the scheme paying a rate higher than the bank rate, a transfer of value subject to tax adjustment would be generated.

Tax risks and documentation in Costa Rica

For companies in Costa Rica, these criteria pose significant risks if intragroup financial transactions are not properly documented. The General Directorate of Taxation uses the OECD Guidelines as a technical reference, meaning these operations are increasingly subject to audits.

The obligation to have a technical study of transfer pricing and to submit the corresponding information return for the 2024 period in 2025 makes it essential that these analyses are properly supported.