Navigating volatility: Managing transfer pricing and intercompany lending in a neo-mercantilist landscape

• Geopolitical and regulatory shifts - including neo-mercantilist policies and BEPS 2.0—are reshaping global tax norms, compelling multinational treasury teams to rethink intercompany financing structures and align them with economic substance and value creation.
• Transfer pricing and intercompany lending now demand rigorous documentation, market-based justifications, and compliance with increasingly complex and divergent international standards, especially around interest rates, risk assessments, and functional substance.
• Strategic treasury planning must integrate indirect tax considerations, adapt to real-time reporting requirements, and proactively model the impact of global tax reforms, while ensuring that financing arrangements are commercially defensible and operationally resilient.

In recent years, the global tax landscape for multinational corporations has undergone significant transformation, driven by both regulatory changes and geopolitical shifts. As nations increasingly embrace neo-mercantilist policies that prioritise domestic economic interests; corporate treasury and tax teams face mounting complexities in managing intercompany financing arrangements. Let’s examine how the evolving geopolitical climate affects transfer pricing, intercompany lending, and cross-border corporate structures, while offering strategic considerations for navigating this evolving environment.

The post-pandemic world has witnessed a notable shift away from globalisation toward economic nationalism. Major economies are implementing policies designed to reshore critical industries, secure supply chains, and protect domestic tax bases. This neo-mercantilist approach has profound implications for corporate tax planning. Tax authorities are increasingly aggressive in questioning the commercial rationale behind intercompany financing structures, particularly those involving low-tax jurisdictions. Countries are implementing digital services taxes, minimum tax regimes, and other unilateral measures outside traditional international frameworks, creating potential double taxation risks. Governments are limiting the flow of critical intellectual property and technology across borders, affecting transfer pricing models built around IP licensing structures. For treasury and tax professionals, these shifts necessitate a more nuanced approach to intercompany transactions that balances tax efficiency with growing political and regulatory risks.

The OECD's Base Erosion and Profit Shifting (BEPS) initiative has evolved into what many practitioners call "BEPS 2.0," centered on two pillars that fundamentally reshape international taxation. 

• Pillar One reallocates taxing rights to market jurisdictions where customers are located, regardless of physical presence. This challenges traditional models where profits flow to IP-holding entities in favourable tax jurisdictions. 
• Pillar Two establishes a global minimum corporate tax rate (effectively 15%), significantly limiting the benefits of profit shifting to low-tax jurisdictions and potentially rendering many existing treasury structures obsolete. Corporate treasury functions must now reconsider centralised financing hubs in low-tax jurisdictions, cash pooling arrangements that concentrate group liquidity, IP holding company structures that drive royalty payments, and captive insurance operations that manage group risk. 

Each of these traditional treasury tools requires recalibration in light of these fundamental changes to the international tax architecture.

Intercompany lending and transfer pricing documentation requirements have grown increasingly sophisticated. Tax authorities now expect comprehensive functional analyses demonstrating the economic substance behind treasury activities, quantitative support for interest rates using actual market comparables, documentation of decision-making processes around capital allocation, and evidence of risk management capabilities within financing entities. The old approach of applying a simple markup to intercompany services or setting arbitrary interest rates on intercompany loans is becoming gradually unviable. Instead, treasury teams must adopt methods that withstand heightened scrutiny, including credit rating methodologies that objectively assess borrower risk profiles, term structure analyses that properly account for loan duration, consideration of subordination, collateral, and other credit enhancements, and adjustments for currency risk and local market conditions. This complexity is further compounded by divergent interpretations of arm's length principles across jurisdictions, creating compliance challenges for centralised treasury operations.

In this challenging environment, corporate treasury and tax functions should consider these strategic approaches:

• Align financing with value creation: Ensure intercompany lending structures reflect where substantive business activities occur and value is created, not simply where favourable tax rates exist.
• Reconsider centralised models: While cash pooling and financing hubs offer efficiency, they create concentration risk in the current environment. Consider more distributed models that align with operational footprints.
• Prioritise substance over form: Focus on establishing genuine commercial rationale and economic substance for treasury locations, with appropriate staffing and governance.
• Develop robust documentation practices: Create contemporaneous documentation of transfer pricing policies, including functional analyses that demonstrate the value added by treasury operations.
• Model tax reform impacts proactively: Use scenario planning to assess how proposed tax reforms might affect existing structures, allowing time for thoughtful restructuring.
• Engage with policymakers: Where appropriate, participate in consultation processes to ensure policymakers understand the practical implications of proposed tax changes on legitimate business operations.