Discounting an obligation to a Group company

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nauman
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Discounting an obligation to a Group company

Post by nauman »

What are the circumstances in which you can get away with not discounting a long term obligation (to a related party)? Would an argument that the working capital cycle of a real estate developer spans over multiple accounting periods (24 to 36 months) be sufficient for such an argument?

A Group company transfers land to real estate developer A to be developed. The Developer develops residential and commercial units on the land and sells these units. At the time of transfer of land from the Group company, it records a payable towards the Group company. Once the payment plan is completed (which can span over the time until the handover of residential / commercial units to buyers) the payable stays in A's books and once the unit is handed over and payments are completed, it makes a payment to the Group company with respect to land (at cost).
JRSB
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Re: Discounting an obligation to a Group company

Post by JRSB »

Charge a small but arm's length interest? Probably pretty low depending where you are
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Marek Muc
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Re: Discounting an obligation to a Group company

Post by Marek Muc »

the cycle doesn't matter here, I think that you can argue from materiality only

BTW: don't you have transfer pricing laws that would make the real estate developer pay tax because of receiving the benefit of free financing? It's always safer to charge interest as JRSB suggested
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nauman
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Re: Discounting an obligation to a Group company

Post by nauman »

There are transfer pricing regulations but because it is within the same jurisdiction and there is no CIT (UAE), the transfer pricing regulations only have consequences on cross border transactions.
pub_acco
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Re: Discounting an obligation to a Group company

Post by pub_acco »

Not sure if it's possible but one creative (or silly) solution might be to interpret the arrangement as a joint operation where the group company contributes the land and the developer contributes skills to jointly collect money from consumers. It must be much easier to just discount the payable though....
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