Risk and Returns Allocation in Decentralized Treasury Functions and the Path to Dispute Resolution

Heightened scrutiny of intercompany finance has revealed grey areas in decentralized treasury models, where decision-making and risk management may lie outside the lending entity. Nevertheless, sometimes, the path of cash flows can matter more than ultimate profit allocation. Under the OECD Transfer Pricing Guidelines, accurate delineation aligns returns with control over risk: the lender is entitled only to a risk-free return, while the risk-taking entity earns the residual. This article shows that equivalent arm’s length profit allocations can arise from different legal and cash flow structures. Yet, those structures may trigger materially different withholding tax exposures and treaty outcomes, underscoring the need to determine appropriate arm’s length contractual terms for financial flows. The study also considers the practical challenges of resolving disputes in decentralized treasury models, noting that while tools such as MAP, the EU Arbitration Convention and the EU Tax Dispute Resolution Directive exist, their effectiveness remains limited.