Japan vs “Guarantee Co. Ltd.”, May 2002, National Tax Tribunal, Cases No. 63, p. 454

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Category: Comparability Analysis, Financial Transactions | Tag: , , , , , , ,
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“Guarantee Co. Ltd.” owned all the shares of G, a company located in the Netherlands, and had provided financial guarantees for loans – in the form of so called “keep well agreements” and guarantee agreements.

The main issue in this case is whether or not it was possible to calculate an arm’s length price for the consideration for the guarantee issued.

Judgement of the National Tax Tribunal

The Tax Tribunal came to the conclusion that the price for the guarantees could be determined based on the CUP method and set at 0,10% of the guaranteed amounts.

Excerpt
“Therefore, a comparative study of the conclusion of each of the Keep Well Agreements, etc. in question and the Bank Guarantee Transactions in question shows that, as stated in (a) of (b) above, the conclusion of each of the Keep Well Agreements, etc. in question is found to have a function substantially equivalent to a guarantee, although there are differences in the contract form from the Bank Guarantee Transactions in question, and therefore, the Bank Guarantee Transactions in question are considered to be “at arm’s length”. The bank guarantee transactions are considered to have the same function as the guarantee transactions, although the contractual form differs from that of the bank guarantee transactions, and therefore, the arm’s length price of each of the Keep Well Agreements is considered to be calculated using the “method equivalent to the arm’s length price method”.
　And since each of the Bank Guarantee Transactions in question, which took place at the same time as the Conclusion of each of the Keep Well Agreements in question, etc., carried out between April 1990 and November 1990, are under the same circumstances as B in (C) in (C) above, the guarantee fee rate (0.1%) for them, even without adjusting for differences for the same reasons as C in (C) above, is ) as the guarantee fee rate to be used for the calculation of the arm’s length price for the conclusion of each of the Keep Well Agreements in question, etc. is reasonable.
　On the other hand, according to the results of the Tribunal’s investigation, the guarantee fee rates for the bank guarantee transactions carried out at the same time as the conclusion of the Keep Well Agreements in question from 1991 onwards are as shown in Annex 6-2, and the level of those guarantee fee rates has increased dramatically compared to before 1990. The reasons for this sharp increase in guarantee fees are, according to the Tribunal’s investigations, generally said to be due to the impact of the BIS regulations on banks or changes in risk management and cost awareness of guarantees in banks, although this is not certain. In addition, the Tribunal was unable to obtain sufficient data on any of the bank guarantee transactions to determine whether or not an adjustment for differences was necessary when they were used as comparator transactions, and to quantify the differences.
　Therefore, it must be said that it is impossible to calculate the arm’s length price for the conclusion of each of the Keep Well Agreements after 1991, using the bank guarantee transactions as comparator transactions.
C. As stated above, with regard to the conclusion, etc. of the Keep Well Agreements up to 1990, it is deemed possible to calculate the arm’s length price by applying a method equivalent to the arm’s length price comparison method using the Bank Guarantee Transactions as the comparable transactions, but with regard to the conclusion, etc. of the Keep Well Agreements in 1991 and later, it is not possible to calculate the arm’s length price by using the arm’s length price comparison method. etc., it is not possible to adopt a method equivalent to the method equivalent to the arm’s length price comparison method, and there is no room for adopting any other method prescribed by government order.”

 
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Japan Cases No. 63, p. 454 National Tax Tribuna ORG

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