TPcases

Database of Transfer Pricing Case Laws

TPG2022 Chapter X paragraph 10.54

Posted on January 20, 2022 | By OECD

Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter X: Transfer Pricing Aspects of Financial Transactions | Tag: Credit assessment, Financial transactions, Intra-group loan, Lender’s and borrower’s perspectives, Loan, Treasury functions

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An independent lender will carry out a thorough credit assessment of the potential borrower to enable the lender to identify and evaluate the risks involved and to consider methods of monitoring and managing these risks. That credit assessment will include understanding the business itself as well as the purpose of the loan, how it is to be structured and the source of its repayment which may include analysis of the borrower’s cash flow forecasts and the strength of the borrower’s balance sheet.

Related Guidelines

TPG2022 Chapter X paragraph 10.55When an enterprise is making a loan to an associated enterprise, it will not necessarily follow all of the same processes as an independent lender. For example, it may not need to go through the same process of information gathering about the borrower’s business, as the required information may already...

TPG2022 Chapter X paragraph 10.61The economic conditions of loans should also be viewed in the context of regulations that may affect the position of the parties. For example, insolvency law in the jurisdiction of the borrower may provide that liabilities towards associated enterprises are subordinated to liabilities towards unrelated parties....

TPG2022 Chapter X paragraph 10.60Macroeconomic circumstances may lead to changes in the financing costs in the market. In such a context, a transfer pricing analysis with regard to the possibilities of the borrower or the lender to renegotiate the terms of the loan to benefit from better conditions will be informed by the options...

TPG2022 Chapter X paragraph 10.59Borrowers will also consider the potential impact of changes in economic conditions such as interest rates and exchange rates, as well as the risk of not being able to make timely payments of interest and principal on the loan if the borrower’s business encounters unexpected difficulties, and the risk of...

TPG2022 Chapter X paragraph 10.58Borrowers seek to optimise their weighted average cost of capital and to have the right funding available to meet both short-term needs and long-term objectives. When considering the options realistically available to it, an independent business seeking funding operating in its own commercial interests will seek the most cost effective...

TPG2022 Chapter X paragraph 10.57Credit risk for the lender is the potential that the borrower will fail to meet its payment obligations in accordance with the terms of the loan. In deciding whether a prospective loan is a good commercial opportunity, a lender will also consider the potential impact of changes which could happen...

TPG2022 Chapter X paragraph 10.56In the case of a loan from the parent entity of an MNE group to a subsidiary, the parent already has control and ownership of the subsidiary, which would make the granting of security less relevant to its risk analysis as a lender. Therefore, in evaluating the pricing of a...

TPG2022 Chapter X paragraph 10.53The lender’s perspective in the decision of whether to make a loan, how much to lend, and on what terms, will involve evaluation of various factors relating to the borrower, wider economic factors affecting both the borrower and the lender, and other options realistically available to the lender for the...

TPG2022 Chapter X paragraph 10.52As in any other transfer pricing scenarios, the guidance in Section D.1 of Chapter I applies to determine whether the lender and the borrower assume risks related to intra-group loans. In particular, it is important to consider the risks that the funding arrangements carry for the party providing the funds,...

TPG2022 Chapter X paragraph 10.51In considering the commercial and financial relations between the associated borrower and lender, and in an analysis of the economically relevant characteristics of the transaction, both the lender’s and borrower’s perspectives should be taken into account, acknowledging that these perspectives may not align in every case....

Supplemental Guidance

Poland vs Cash Pool B sp z.o.o., November 2019, Supreme Administrative Court, Case No II FSK 3798/17A Polish company argued that cash pooling transfers could not be classified as loans due to the absence of written contract terms. The tax authority disagreed. The Supreme Administrative Court upheld the 2018 provincial court ruling in 2019, finding that cash pool deposits constitute intra-group loans from an economic standpoint,...

Poland vs L S.A, June 2019, Supreme Administrative Court, Case No. II FSK 1808/17 – Wyrok NSAA Polish subsidiary of a German group deducted significant interest on an intra-company loan, prompting a tax authority adjustment to the interest rate and increased taxable income. The Administrative Court rejected the company's complaint, and Poland's Supreme Administrative Court dismissed the subsequent appeal in June 2019, confirming that the arm's...

Peru vs Telefonica, July 2019, Supreme Court, Case No 11111-2016, LimaTelefónica challenged SUNAT's adjustments across five issues before Peru's Supreme Court in 2019, including financial charge carve-outs, asset depreciation, overhead deductions, and doubtful debt provisions. The court sided with the tax authority on two issues: the treatment of financial charges related to funding arrangements and the disallowance of overhead deductions...

Poland vs Q. F. sp. z o.o., January 2021, Supreme Administrative Court, Case No II FSK 2514A Polish company argued that only interest, not principal, should count toward the value of related-party loan transactions when assessing transfer pricing documentation thresholds. The tax authority held that both capital and interest must be included. The Supreme Administrative Court agreed with the tax authority in January 2021, applying a...

Finland vs A Oyj, May 2021, Supreme Administrative Court, Case No. KHO:2021:66A Finnish parent company charged interest on loans to its Russian subsidiary based on the group's external financing costs plus a margin. The Finnish Tax Administration argued that ZAO C's standalone credit rating should determine the arm's length rate, proposing significantly higher margins. Finland's Supreme Administrative Court ruled in favour...

Bulgaria vs “K-Bul”, March 2016, Supreme Administrative Court, Case No 2690 (3943/2015)A Bulgarian subsidiary received intra-group financing under contracts concluded in 2007 and 2010. Tax authorities benchmarked the interest rates using Bulgarian National Bank statistics, restating taxable income accordingly. The Administrative Court found the BNB data inadequate for proper comparability analysis. Bulgaria's Supreme Administrative Court upheld that ruling in 2016, remanding...

Poland vs “F-inance. Sp. z o.o.”, October 2010, Administrative Court, Case No I SA/Kr 1188/10A Polish company provided loans to its wholly-owned special-purpose vehicle to finance an investment. The tax authority assessed additional income, arguing the arrangement deviated from the arm's length principle due to unpaid principal and interest. The Administrative Court ruled in favour of the taxpayer in 2010, finding the authority had...

Spain vs “Group Rating SA”, November 2023, TEAC, Case No RG 8283/2020A Spanish company received an assessment challenging the credit rating used to price intra-group loans. The tax authority argued that group membership and implicit parental support required applying the group's consolidated credit rating rather than a stand-alone rating. The TEAC upheld the assessment in November 2023, confirming that notching up...

TPcases

TPG2022 Chapter X paragraph 10.54

Related Guidelines

Supplemental Guidance

Related Case Law