Last Call for U.S. Borrowers: Maximize Tax Planning with Intercompany Financing Before Rates Drop Further
Introduction
On September 18, 2024, the Federal Reserve finally began to lower rates by deciding to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. The lowering of rates is usually met with glee, and for good reason as the cost of homes, cars, and other goods become cheaper.
However, through the lens of tax planning, this move by the Federal Reserve also represents the last window of opportunity for U.S. taxpayers to lock in higher interest rates to maximize potential tax benefits before rates go down further. This article highlights why immediate action is essential for U.S. taxpayers to optimize tax planning opportunities for intercompany financing arrangements.
Why Now? The Shifting Interest Rate Landscape
As the Federal Reserve’s rate cuts continue, the opportunity to justify and secure a higher intercompany interest rates will rapidly diminish. Higher rates currently allow U.S. firms to increase deductible interest expenses, effectively reducing taxable income and enhancing cash flow. With market rates expected to decline further, the ability to support these favorable terms will become increasingly difficult, making it crucial for companies to act now.
Key Reasons to Act Now
- Capitalize on High Interest Rates Before They Disappear: Debt financing is treated favorably under U.S. tax law by providing an interest deduction that is up to 30 percent of taxpayer’s EBIT. Establishing a higher interest rate before market rates fall allows a taxpayer to maximize this tax deduction and reduce U.S. taxable income. Once market rates fall, the base rate available for financing will be lower than is available now!
- Defend Your Interest Rates Against IRS Scrutiny: As market conditions shift, the IRS is increasingly attentive to whether intercompany interest rates are in line with current market realities. By acting now, firms can establish higher rates supported by today’s economic environment, reducing the likelihood of adjustments that could result in higher U.S. tax liabilities.
- Improved Global Tax Position and Cash Flow Management: Intentional tax planning can help reduce the global tax burden for a company while enhancing global cash flow management.
Strategies for U.S. Borrowers: Act Fast or Miss Out!
- Evaluate the Creditworthiness of Borrower and Benchmark Interest Rates: Conduct a thorough analysis to assess the creditworthiness of the borrower to help determine an appropriate arm’s length interest rate that takes into account current market conditions.
- Forecast Tax Calculations: Proactively forecast tax calculations to quantify the potential global tax benefits of securing higher intercompany loan rates now. By modeling different rate scenarios, firms can determine the impact on U.S. taxable income and overall group tax liabilities, illustrating the tax savings achievable under current market conditions.
- Formalize the Intercompany Loan Agreement: Ensure all intercompany loans are backed by legally binding agreements that clearly outline the terms, including the rationale for the interest rate. Proper documentation is essential to defend the arm’s length nature of the arrangement and mitigate the risk of recharacterization as equity.
Conclusion
This is the final call for U.S. companies to act strategically and lock in favorable intercompany financing rates before further Federal Reserve rate cuts eliminate this opportunity.
Bennett Thrasher’s transfer pricing practice is well-positioned to assist taxpayers in developing and implementing transfer pricing policies that are formalized by transfer pricing agreements. For more information, please contact Benjamin Miller, Tax Partner, or Abbas Raza, Transfer Pricing Senior Manager. Or call 770.396.2200.
Bennett Thrasher is an approved National Tax Resource Center provider for transfer pricing. Read about their practice below!
Transfer Pricing
Practice Overview
Bennett Thrasher’s Transfer Pricing practice focuses on designing, implementing and maintaining transfer pricing policies that are advantageous from a business perspective and compliant with regulations and laws in the applicable jurisdictions. We work closely with our clients to truly understand the corporate structure and overall vision of their company, which allows us to create a tailored approach that satisfies relevant rules and regulations while also being efficient and practical to implement. Our practice’s professionals have extensive experience evaluating the transfer prices of tangible goods, intangible property, services and loans for various purposes, including penalty protection documentation, planning, international supply chain/debt restructuring, advance pricing agreements, audit defense and due diligence for mergers and acquisitions.
Practice Focus
Our Transfer Pricing practice serves multinational companies, ranging from small- and medium-sized businesses to multibillion-dollar organizations. The practice is industry agnostic and works with clients in all stages of their life cycle, from startups to cash cows, advising them on their transfer pricing strategy in developing and developed economies worldwide. In addition, we support several domestic U.S. corporate groups and family offices. All of our clients require carefully thought out transfer pricing policies, which are designed to mitigate the risks of forced adjustments and penalties and align with strategic business objectives.
Team and Additional Qualifications
Our Transfer Pricing practice is comprised of four associates, including certified public accountants, a PhD Economist and a Chartered Financial Analyst candidate, with vast experience designing, implementing and maintaining transfer pricing policies on behalf of public and private companies. We are fluent in both English and Spanish.
Ben Miller
