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Is an intercompany lease required?

If you have 1 subsidiary lending revenue generating equipment to a different subsidiary, doesn't GAAP require you to have an intercompany lease for some consideration as if this was an arms length transaction with an unaffiliated company?  If so, can you point me to the rule that states this?

Answers

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

It's not GAAP that requires it since the consolidated results will eliminate the intercompany transaction but, you are very correct, that the arm's length principle embedded in most countries' tax/transfer pricing regulations will require it. This situation where use of a fixed asset is provided by one affiliate to another is sometimes overlooked because it's less common than typical intercompany transactions related to goods, services or financing.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

The "arms length" requirement is primarily a judicial concept, used frequently when determining taxable liability. But, if you are audited, your Auditors will be focused on the inter-company transactions for the purposes of validating Notes to the Financial Statements - http://pcaobus.org/Standards/Auditing/Pages/AU9334.aspx.

Anonymous
(Accountant) |

Jake,

Do you know of any specific tax rulings for USA that would lead a company to book an intercompany lease on their financials?

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

GAAP provides for onsolidation, but not for reaquired documentation. Related party disclosures, however, may be required. If the two entities file separate income tax returns, intercompany pricing will be a tax issue.

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