Credit risk refers to the risk of loss resulting from the inability of cash pool members with debit positions to repay their cash withdrawals. From the cash pool leader’s perspective, there needs to be a probability for it to incur losses derived from the default of cash pool members with debit positions to bear the credit risk. Therefore, an examination under Chapter I guidance will be required to determine, under the specific facts and circumstances, which entity within the MNE group is exercising control functions and has the financial capacity to assume the credit risk associated with the cash pool arrangement ...

Credit 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 in economic conditions affecting the credit risk it bears, not only in relation to the conditions of the borrower but in relation to potential changes in economic conditions, such as a rise in interest rates, or the exposure of the borrower to movements in exchange rates ...

A second example relates to the purported transfer of credit risk as part of a business restructuring. The analysis under Section D. 1.2.1 of Chapter I would take into account the contractual terms before and after the restructuring, but would also examine how the parties operate in relation to the risk before and after the restructuring. The analysis would then examine whether the party that contractually assumes the risk controls the risk in practice through relevant capability and decision-making as defined in paragraph 1.65 and has the financial capacity to assume such risk as defined in paragraph 1.64. It is important to note that a party that before the restructuring did not assume a risk under the analysis of Section D. 1.2.1 of Chapter I cannot transfer it to another party, and a party that after the restructuring does not assume a risk under the analysis of Section D. 1.2.1 of Chapter I should not be allocated the profit potential associated with that risk. For example, suppose that before a business restructuring, a full-fledged distributor contractually assumes bad debt risks, which is reflected in the balance sheet at year end. However, the analysis described above establishes that before the business restructuring, decisions about the extension of credit terms to customers and debt recovery were taken by an associated enterprise and not by the distributor, and the associated enterprise reimbursed the costs of irrecoverable debts. It is also determined that the associated enterprise is the only entity that controlled the risk and had the financial capacity to assume the bad debt risk, leading to the conclusion that, before the business restructuring, the risk was not assumed by the distributor. In such a case there is no bad debt risk for the distributor to transfer as part of the business restructuring. In other circumstances it may be found that before the business restructuring the distributor controlled the bad debt risk and had the financial capacity to assume the risk it contractually assumed, but mitigated its risk through indemnification arrangements or debt factoring arrangements with an associated enterprise in exchange for appropriate compensation. Following the business restructuring, the bad debt risk is contractually assumed by that associated enterprise which, as determined under the analysis described above, now controls the risk and has the financial capacity to assume the risk. The risk has, therefore been transferred but the impact on the profits of the distributor going forward compared with the past resulting from the transfer of this risk alone may be limited, because before the restructuring steps had been taken and costs incurred to mitigate the risk outcomes of the distributor ...

Credit risk refers to the risk of loss resulting from the inability of cash pool members with debit positions to repay their cash withdrawals. From the cash pool leader’s perspective, there needs to be a probability for it to incur losses derived from the default of cash pool members with debit positions to bear the credit risk. Therefore, an examination under Chapter I guidance will be required to determine, under the specific facts and circumstances, which entity within the MNE group is exercising control functions and has the financial capacity to assume the credit risk associated with the cash pool arrangement ...

A second example relates to the purported transfer of credit risk as part of a business restructuring. The analysis under Section D. 1.2.1 of Chapter I would take into account the contractual terms before and after the restructuring, but would also examine how the parties operate in relation to the risk before and after the restructuring. The analysis would then examine whether the party that contractually assumes the risk controls the risk in practice through relevant capability and decision-making as defined in paragraph 1.65 and has the financial capacity to assume such risk as defined in paragraph 1.64. It is important to note that a party that before the restructuring did not assume a risk under the analysis of Section D. 1.2.1 of Chapter I cannot transfer it to another party, and a party that after the restructuring does not assume a risk under the analysis of Section D. 1.2.1 of Chapter I should not be allocated the profit potential associated with that risk. For example, suppose that before a business restructuring, a full-fledged distributor contractually assumes bad debt risks, which is reflected in the balance sheet at year end. However, the analysis described above establishes that before the business restructuring, decisions about the extension of credit terms to customers and debt recovery were taken by an associated enterprise and not by the distributor, and the associated enterprise reimbursed the costs of irrecoverable debts. It is also determined that the associated enterprise is the only entity that controlled the risk and had the financial capacity to assume the bad debt risk, leading to the conclusion that, before the business restructuring, the risk was not assumed by the distributor. In such a case there is no bad debt risk for the distributor to transfer as part of the business restructuring. In other circumstances it may be found that before the business restructuring the distributor controlled the bad debt risk and had the financial capacity to assume the risk it contractually assumed, but mitigated its risk through indemnification arrangements or debt factoring arrangements with an associated enterprise in exchange for appropriate compensation. Following the business restructuring, the bad debt risk is contractually assumed by that associated enterprise which, as determined under the analysis described above, now controls the risk and has the financial capacity to assume the risk. The risk has, therefore been transferred but the impact on the profits of the distributor going forward compared with the past resulting from the transfer of this risk alone may be limited, because before the restructuring steps had been taken and costs incurred to mitigate the risk outcomes of the distributor ...