This section elaborates on the effect of group membership on determining the arm’s length price of financial guarantees, building upon the principles laid out in Section C.1.1.
TPG2022 Chapter X paragraph 10.162
Posted on |
By OECD
Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter X: Transfer Pricing Aspects of Financial Transactions | Tag: Effect of group membership, Explicit guarantee, Financial guarantee, Financial transactions, Letter of comfort, Loan guarantee, Passive association, Treasury functions
« Prev |
Next » Related Guidelines
- TPG2022 Chapter X paragraph 10.163By providing an explicit guarantee the guarantor is exposed to additional risk as it is legally committed to pay if the borrower defaults. Anything less than a legally binding commitment, such as a “letter of comfort” or other lesser form of credit support, involves no explicit assumption of risk. Each...
- TPG2022 Chapter X paragraph 10.185Assume that the accurate delineation of the actual transaction shows that the effect of passive association raises Company D’s credit standing from BBB to A, and that the provision of the explicit guarantee additionally enhances the credit standing of Company D to AAA. Assume further that independent lenders charge an...
- TPG2022 Chapter X paragraph 10.175The next step would be to determine, by a similar process (unless directly observable in the case of a loan from a third party), the interest rate payable with the benefit of the explicit guarantee. The interest spread can be used in quantifying the benefit gained by the borrower as...
- TPG2022 Chapter X paragraph 10.164A borrower would not generally be prepared to pay for a guarantee if it did not expect to obtain an appropriate benefit in return. Even an explicit guarantee will not necessarily confer a benefit on the borrower; for example, banking covenants applicable to a parent or other MNE group member’s...
- TPG2022 Chapter X paragraph 10.159Where the effect of an intra-group guarantee as accurately delineated is to reduce the cost of debt-funding for the borrower, it might be prepared to pay for that guarantee, provided it was in no worse a position overall. In considering the borrower’s overall financial position as a result of the...
- TPG2022 Chapter X paragraph 10.156The accurate delineation of financial guarantees requires initial consideration of the economic benefit arising to the borrower beyond the one that derives from passive association, as explained in the Section C.1.1.3....
- TPG2022 Chapter X paragraph 10.188The accurate delineation of the actual transaction indicates that the enhancement of Company D’s credit standing from A to AAA is attributable to a deliberate concerted group action, i.e. the guarantee provided by Company M. Company D would be expected to be willing to pay an arm’s length guarantee fee...
- TPG2022 Chapter X paragraph 10.187Consider the same fact pattern as described in Example 1, but in this case assume that under the guidance in Section D.2, comparable uncontrolled transactions can be identified showing that the arm’s length price of a comparable guarantee would be in the range of 1% to 1.5%....
- TPG2022 Chapter X paragraph 10.186In that situation, the analysis under Chapter I may indicate that an independent enterprise borrowing under the same conditions as Company D would not be expected to pay a guarantee fee of 3% to Company M for the provision of the explicit guarantee since Company D is better off in...
- TPG2022 Chapter X paragraph 10.184Company M, the parent entity of an MNE group, maintains an AAA credit rating based on the strength of the MNE group’s consolidated balance sheet. Company D, a member of the same MNE group, has a credit rating of only BBB on a stand-alone basis, and needs to borrow EUR...