Taxpayers required to prepare transfer pricing documentation are uncertain if the loan principal is to be reported according to the amount expressed in the contract or perhaps the highest amount of principal made available during the documented period under the contract or under other documents.

Recent tax rulings on the topic of valuation of loan transactions generally suggest that the value of principal for a tax year should be quantified by reference to the highest amount of principal that has been made available and remains outstanding in the tax year for which the documentation is prepared. The same response was given to a parliamentary question. Unfortunately, this construal is at odds with the literal wording of the applicable law.


What the law says

In accordance with the income tax statutes, the value of an intercompany loan transaction should be quantified by reference to the amount of principal arising from the contract or other documents. The issue is in how to understand the term “amount of principal”: is it the amount expressed in the contract, or is it the highest amount of outstanding principal that was made available during the reporting period. The first approach is the safest for taxpayers but involves more work on transfer pricing documentation and TRP reporting.


What the tax authorities say

Replying on 16 February 2022 to parliamentary question no. 29105 dated 15 December 2021 (ref. DCT2.054.2.2021), the Finance Minister said that in investigating whether a taxpayer will have to report a loan transaction for a given tax year regard must be had to the amount of the principal for the tax year and, for multi-annual contracts, it is necessary to verify if the principal exceeds the statutory materiality threshold in the first and each subsequent year. Accordingly, the taxpayer should quantify the principal amount for the documented year by reference to the highest amount which has been made available, and remains outstanding in that period.


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