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The Transfer Pricing Beat: News for the Week of February 15, 2021

Croatia Lowers Arm’s-Length Interest Rate for Related Parties 

Croatia’s arm-length interest rate for loans is decreasing for related parties. Effective January 1st, 2021, the maximum deductible interest rate on loans from a foreign-related party is 3%. The previous rate was 3.42% per annum. In addition, the minimum taxable interest rate on loans to a foreign related party was also lowered from 3.42% to 3% per annum. As it stands, the interest rates are also applicable to related-party loans between two Croatian taxpayers if one is in a “tax favorable” position.  

The U.S. Looks to Draft New Transfer Pricing Rules 

Transfer pricing in the United States is getting some attention. The U.S. Treasury and IRS are spearheading the effort to draft new regulations for transfer pricing rules. The project, under Internal Revenue Code Section 482, is set to spotlight valuation of assets, along with other issues. Here’s what happened: The Tax Cuts and Jobs Act, or TCJA, changed the definition of intangible assets to include goodwill. Goodwill is an intangible asset that cannot be separately identified within the company or organization. The TCJA also included workforce in place and going-concern value, which tie to the value of an existing business, in the definition of intangible assets. While change is coming, the scope isn’t as wide as it could be. In a recent court case with Amazon, the IRS tried to treat residual assets as intangible assets (and be priced as such) under transfer pricing rules. Unfortunately, it was met with harsh criticism—the court ruled against the IRS. There’s also talks of a smaller project on IRC Section 367(d) which addresses inbound transactions with intellectual property.  

Israel Tax Authority Releases Circular on Stock-Based Compensation  

The Israeli Tax Authorities recently released Income Tax Circular 1/2021. It clarifies the appropriate treatment of intercompany recharges from stock-based compensation for transfer pricing purposes. In 2018, the Israeli Supreme Court declared that stock-based compensation is part of the cost base for transfer pricing. The circular further explains the tax authorities take on the ruling. It indicates that stock-based payments should be considered a recharge cost, not a dividend or capital reduction. To be considered a recharge, the payment must meet the following criteria: it reflects the value verified in financial statements, it’s made only in exchange for vested equity agreements, and is included in the cost base. If it doesn’t check all the boxes, it’s classified as dividend or capital reduction.