Mylan Australia Holding is a subsidiary of the multinational pharmaceutical company Mylan Group. Mylan Australia Holding is the head of the Australian tax consolidated group, which includes its subsidiary Mylan Australia Pty. In 2007, Mylan Australia Pty acquired the shares of Alphapharm Pty Ltd and a substantial loan (A$923,205,336) was provided by a group company in Luxembourg to finance the acquisition. In subsequent years the interest expense was deducted from the taxable income of Mylan’s Australian tax group. The Australian Taxation Office (ATO) issued amended assessments to Mylan Australia Holding disallowing approximately AUD 589 million of interest deductions claimed for the 2007 to 2017 tax years. The ATO had initially pursued the structure as a transfer pricing issue, but ultimately argued that the deductions should be disallowed under the general anti-avoidance rule. Mylan Australia Holding appealed to the Federal Court. Judgment of the Court The Federal Court decided in favour of Mylan Australia Holding and set aside the amended assessment issued by the tax office. Excerpts “The conclusions I have reached on the principal issues are as follows: (a) MAHPL did not obtain a tax benefit in connection with the primary scheme that may be calculated by reference to the primary counterfactual; (b) had none of the schemes been entered into or carried out, the most reliable — and a sufficiently reliable — prediction of what would have occurred is what I have termed the “preferred counterfactual”; (c) the principal integers of the preferred counterfactual are as follows: (i) MAPL would have borrowed the equivalent of AUD 785,329,802.60 on 7 year terms under the SCA (specifically the term applying to Tranche B), at a floating rate consistent with the rates specified in the SCA; (ii) MAPL would otherwise have been equity funded to the extent necessary to fund the initial purchase of Alphapharm and to stay within the thin capitalisation safe harbour ratio from time to time; (iii) Mylan would have guaranteed MAPL’s borrowing under the SCA; (iv) Mylan would not have charged MAPL a guarantee fee; (v) interest on the borrowing would not have been capitalised; (vi) MAPL would have been required to pay down the principal on a schedule consistent with that specified in the SCA and would have made voluntary repayments to reduce its debt as necessary to stay within the thin capitalisation safe harbour, from time to time; (vii) MAPL would not have taken out hedges to fix some or all of its interest rate expense; (viii) MAPL would have taken out cross-currency swaps into AUD at an annual cost of 3.81% per annum over AUD 3 month BBSW; and (ix) if MAPL’s cashflow was insufficient to meet its interest or principal repayment obligations, Mylan would have had another group company loan MAPL the funds necessary to avoid it defaulting on its obligations, resulting in MAPL owing those funds to that related company lender by way of an intercompany loan, accruing interest at an arm’s length rate; (d) MAHPL did (subject to matters of calculation) obtain a tax benefit in connection with the schemes, being the difference between the deductions for interest obtained in fact, and the deductions for interest that would be expected to be allowed on the preferred counterfactual; and (e) MAHPL has discharged its onus in relation to the dominant purpose enquiry specified by s 177D of the ITAA36 and so has established that the assessments issued to it were excessive.” “Conclusions on dominant purpose I do not consider that, having regard to the eight matters in s 177D(b), it would be concluded that Mylan or any other of the persons who entered into or caried out the schemes or any part of the schemes did so for the purpose of enabling MAHPL to obtain a tax benefit in connection with the schemes. Of the numerous topics addressed above in relation to those eight matters, only one supports a contrary conclusion: the failure to refinance PN A2 or otherwise revisit the interest rate paid on PN A2. Nevertheless, the authorities recognise that not all matters need to point in one direction, whether the conclusion is that that there was the requisite dominant purpose, or the converse: see, eg, Sleight at [67] (Hill J). Other matters addressed are neutral, or point to purposes other than obtaining a tax benefit in connection with the schemes. It must be recalled that merely obtaining a tax benefit does not satisfy s 177D: Guardian at [207] (Hespe J, Perry and Derrington JJ agreeing). Nor does selecting, from alternative transaction forms, one that has a lower tax cost of itself necessarily take the case within s 177D. It is, as the plurality explained in Spotless Services (at 416), only where the purpose of enabling the obtaining of a tax benefit is the “ruling, prevailing, or most influential purpose” that the requisite conclusion will be reached. In my assessment, MAHPL has established that, assessed objectively (and keeping in mind that the question is not what Mylan’s actual, subjective purpose was), the facts of this case do not attract that conclusion.” Click here for translation ...

A Dutch company “Tobacco B.V.” belonging to an internationally operating tobacco group was subjected to (additional assessment) corporate income tax assessments according to taxable amounts of €2,850,670,712 (2013), €2,849,204,122 (2014), €2,933,077,258 (2015) and €3,067,630,743 (2016), and to penalty fines for the year 2014 of €1,614,709, for the year 2015 of €363,205 and for the year 2016 of €125,175,082. In each case, the dispute focuses on whether the fees charged by various group companies for supplies and services can be regarded as business-related. Also in dispute is whether transfer profit should have been recognised in connection with a cessation of business activities. One of the group companies provided factoring services to “Tobacco B.V.”. The factoring fee charged annually for this includes a risk fee to cover the default risk and an annual fee for other services. The court concluded that the risk was actually significantly lower than the risk assumed in determining the risk fee, that the other services were routine in nature and that the factoring fee as a whole should be qualified as impractical. “Tobacco B.V.” has not rebutted the presumption that the disadvantage caused to it by paying the factoring fees was due to the affiliation between it and the service provider. In 2016, a reorganisation took place within the tobacco group in which several agreements concluded between group companies were terminated. The court concluded that there had been a coherent set of legal acts, whereby a Dutch group company transferred its business activities in the field of exporting tobacco products, including the functions carried out therein, the risks assumed therein and the entire profit potential associated therewith, to a group company in the UK. For the adjustment related to the transfer profit, the court relies on the projected cash flows from the business and information known at the time the decision to transfer was taken. The conclusions regarding factoring and the termination of business activities in the Netherlands lead to a deficiency in the tax return for each of the years 2014 to 2016. For these years, “Tobacco B.V.” filed returns to negative taxable amounts. For the years 2014 and 2016, a substantial amount of tax due arises after correction, even if the corrections established by application of reversal and aggravation are disregarded. For the year 2015, the tax due remains zero even after correction. Had the return been followed, this would have resulted in “Tobacco B.V.” being able to achieve, through loss relief, that substantially less tax would be due than the actual tax due. At the time the returns were filed, “Tobacco B.V.” knew that this would result in a substantial amount of tax due not being levied in each of these years and the court did not find a pleading position in this regard. The burden of proof is therefore reversed and aggravated. For the year 2013, this follows from the court’s decision of 17 October 2022, ECLI:NL:RBNHO:2022:8937. To finance their activities, the group companies issued listed bonds under the tobacco group’s so-called EMTN Programme, which were guaranteed by the UK parent company. A subsidiary of “Tobacco B.V.” joined in a tax group paid an annual guarantee fee to the UK parent company for this purpose. The court ruled that: – the guarantee fees are not expenses originating from the subsidiary’s acceptance of liability for debts of an affiliated company; – the EMTN Programme is not a credit arrangement within the meaning of the Umbrella Credit Judgment(ECLI:NL:HR:2013:BW6520); – “Tobacco B.V.” has made it clear that a not-for-profit fee can be determined at which an independent third party would have been willing to accept the same liability on otherwise the same terms and conditions; – “Tobacco B.V.” failed to show that in the years in which the guarantee fees were provided, credit assessments did not have to take implied guarantee into account; – “Tobacco B.V.” failed to show that its subsidiary was not of such strategic importance to the group that its derivative rating did not match the group rating, so that the guarantee fees paid are not at arm’s length due to the effect of implied guarantee in their entirety; – “Tobacco B.V.” did not put forward any contentions that could rebut the objectified presumption of awareness that follows from the size of the adjustments (the entire guarantee fee), that the disadvantage suffered by the plaintiff as a result of the payment of the guarantee fees is due to its affiliation with its parent company. A group company charges the claimant, inter alia, a fee corresponding to a percentage of “Tobacco B.V.”‘s profits (profit split) for activities on behalf of the tobacco group that result in cost savings for “Tobacco B.V.”. The court ruled that “Tobacco B.V.” failed to prove that the group company made a unique contribution to the tobacco group that could justify the agreed profit split. The group company also charges “Tobacco B.V.” a fee equivalent to a 12% mark-up on costs for services relating to the manufacture of cigarettes. The court ruled that, in the context of the reversal and aggravation of the burden of proof, it was not sufficient for “Tobacco B.V.” to refer to the functional analysis, as it was based on the incorrect premise that the group company could be compared to a manufacturer. Finally, since April 2012, “Tobacco B.V.” has been paying the group company a 10% fee on the costs excluding raw materials for the production of cigarettes as toll manufacturer, where previously the basis of this fee also included the costs of raw materials. The court noted that the flow of goods remained the same and that “Tobacco B.V.” remained operationally responsible for the production process. The court ruled that it was up to “Tobacco B.V.” to establish and prove facts from which it follows that it was businesslike to change the basis of remuneration, which it did not do sufficiently. Regarding an adjustment made by the tax authorities in relation to reorganisation costs, the court finds that the adjustment was made in error ...

On 17 April 2015, “Loan Ltd” entered into a bond loan agreement with related parties. The effective interest rate charged to “Loan Ltd” (borrowing costs) in the years under consideration (2016 and 2017) was 8.1%. The interest rate had been determined based on the CUP method and external comparable data. The tax authorities determined the arm’s length interest rate for the loan to be 4,03% and issued an assessment of the additional taxable income resulting from the lower borrowing costs. A complaint was filed by “Loan Ltd” Decision of the Board The Board dismissed the complaint and upheld the assessment of the tax authorities. Excerpt “Because the applicant claims that the audit used inappropriate/non comparable data. Because, however, the audit chose the most reliable internal data in accordance with the OECD Guidelines, namely the interest rate agreed with a third independent bank for the provision of a credit facility (2.03%), which it adjusted by the percentage of the guarantee fee provided by the parent company (2%), resulting in an interest rate in accordance with the principle of equivalence equal to 4.03%. This adjustment is correct, in line with the OECD Guidelines and in the context of good administration. In particular, paragraph 10.177 of the OECD Guidelines states that: “The result of this analysis sets a maximum premium for the guarantee (the maximum amount the guarantee recipient will be willing to pay), i.e. the difference between the interest rate with the guarantee and the interest rate without the guarantee. […] The borrower would not have any incentive to enter into a guarantee agreement if, in total, he pays an amount (to the bank interest and to the guarantor commission) equal to what he would have paid to the bank without the guarantee (interest). Therefore, this maximum commission does not necessarily reflect the result of a negotiation made on a purely commercial basis, but represents the maximum that the borrower would be willing to pay’. The audit, in direct application of the OECD Guidelines, adjusted the lending rate by the maximum commission. Otherwise, the borrower would have paid an aggregate amount (interest to the bank and commission to the guarantor) higher than the amount he would have paid to the bank without the guarantee (interest). Because the audit, to corroborate the audit findings and its reasoning , also sought external comparable data (on an ancillary basis), namely, interest rates of comparable loans from the Bank of Greece and the Bank of Denmark. The Bank of Greece yielded an interest rate of 5.02% and from the Bank of Denmark 3.70% (3% plus 0.70% to reflect the country-Greece risk ). Because the above external comparables confirm the correctness of the audit approach, as they are close to the interest rate determined by the audit (4.03%) and at a significant deviation from the interest rate of the assessed intragroup transaction (8.1%). It should be noted that the reliance on central bank data is in line with a number of decisions of our Office (see, for example, BIT 4560/2021), but also a common methodology in numerous Documentation Files. As therefore, the claim of the applicant is rejected as unfounded.” Click here for English translation Click here for other translation ...

“Korean Clothing Corp” had two overseas subsidiaries – a fabric dyeing entity (AAA) and a sweater manufacturing entity (BBB). Following an tax audit for FY 2016~2020, the tax authorities issued an assessment of additional tax as a result of non arm’s length transactions. According to the tax authorities “Korean Clothing Corp” had not collected accounts receivables from related parties AAA and BBB, which had passed the typical payment terms. An arm’s length interest on the outstanding amount had therefor been calculated based on the weighted average interest rates in comparable transactions between independent parties. “Korean Clothing Corp” had also provided a financial guarantee to AAA related to a bank loan in 2014, which later resulted in “Korean Clothing Corp” paying back the loan to the bank in FY2018 and FY2019. “Korean Clothing Corp” accounted for the payment as a loss from the discontinued business in FY2018 and as a ‘miscellaneous loss’ in FY2019. The tax authorities found that “Korean Clothing Corp” arbitrarily had paid back the loan on behalf of AAA and that the amount in question was a non-deductible expense. A complaint was filed by “Korean Clothing Corp” with the Tax Tribunal. Decision of the Tax Tribunal The tribunal dismissed the complaint of “Korean Clothing Corp” and upheld the assessment issued by the tax authorities. The court found that the arm’s length interest rate applied by the tax authorities was reasonable and that denying the tax deductions for the payment of AAA’s loan was also in accordance with local tax regulations. Click here for English translation Click here for other translation ...

17 January 2023 the South African Revenue Service (SARS) released an interpretation note titled “DETERMINATION OF THE TAXABLE INCOME OF CERTAIN PERSONS FROM INTERNATIONAL TRANSACTIONS: INTRA-GROUP LOANS” which provides guidance on how SARS will determine arm’s length pricing for intra-group loans. The Note also provides guidance on the consequences for a taxpayer if the amount of debt, the cost of debt or both are not arm’s length. According to the note an intra-group loan would be incorrectly priced if the amount of debt funding, the cost of the debt or both are excessive compared to what is arm’s length ...

The South African Revenue Service (SARS) has published a comprehensive Interpretation Note on intra-group loans. The note provides taxpayers with guidance on the application of the arm’s length principle in the context of the pricing of intra-group loans. The pricing of intra-group loans includes a consideration of both the amount of debt and the cost of the debt. An intra-group loan would be incorrectly priced if the amount of debt funding, the cost of the debt or both are excessive compared to what is arm’s length. The Note also provides guidance on the consequences for a taxpayer if the amount of debt, the cost of debt or both are not arm’s length. The guidance and examples provided are not an exhaustive consideration of every issue that might arise. Each case will be decided on its own merits taking into account its specific facts and circumstances. The application of the arm’s length principle is inherently of a detailed factual nature and takes into account a wide range of factors particular to the specific taxpayer concerned ...

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp. z o.o. be obliged to disclose the event related to the free-of-charge consideration received in a simplified CIT/TP report, both for the year in which the guarantee is granted and for subsequent tax years during which the guarantee is in effect. In A. Sp. z o.o.’s opinion, the company was not obliged to prepare transfer pricing documentation in connection with the gratuitous service received. And if the tax authority’s decision was contrary to the Company’s position, documentation should be prepared only for the tax year in which the guarantees was entered. The tax authorities disagreed with the company, and a complaint was filed by A. Sp. Z o.o. with the Administrative Court. In March 2019 the Administrative Court dismissed the complaint of A. Sp. z o.o. and sided with the tax authorities. An appeal was then filed by the company with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The court dismissed the appeal and upheld the decision of the Administrative Court. Guidance on the understanding of the notion of “transaction”, was published by Polish Ministry of Finance in December 2021. Click here for English Translation Click here for other translation ...

The 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 to Company M for the provision of the explicit guarantee since Company D is better off than in the absence of the guarantee ...

Consider 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% ...

In 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 the absence of the guarantee ...

Assume 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 interest rate of 8% to entities with a credit rating of A, and of 6% to entities with a credit rating of AAA. Assume further that Company M charges Company D a fee of 3% for the provision of the guarantee so the guarantee fee more than completely offsets the benefit of Company D’s enhanced credit standing derived from the provision of such guarantee ...

Company 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 10 million from an independent lender ...

The capital support method may be suitable where the difference between the guarantor’s and borrower’s risk profiles could be addressed by introducing more capital to the borrower’s balance sheet. It would be first necessary to determine the credit rating for the borrower without the guarantee (but with implicit support) and then to identify the amount of additional notional capital required to bring the borrower up to the credit rating of the guarantor. The guarantee could then be priced based on an expected return on this amount of capital to the extent that the expected return so used appropriately reflects only the results or consequences of the provision of the guarantee rather than the overall activities of the guarantor- enterprise ...

The valuation of expected loss method would estimate the value of a guarantee on the basis of calculating the probability of default and making adjustments to account for the expected recovery rate in the event of default. This would then be applied to the nominal amount guaranteed to arrive at a cost of providing the guarantee. The guarantee could then be priced based on an expected return on this amount of capital based on commercial pricing models such as the Capital Asset Pricing Model (CAPM) ...

Pricing under each model will be sensitive to the assumptions made in the modelling process. Whatever valuation model is used, the evaluation of cost method sets a minimum fee for the guarantee (the minimum amount that the provider of the guarantee will be willing to accept) and does not of itself necessarily reflect the outcome of a bargain made at arm’s length. The arm’s length amount should be derived from a consideration of the perspectives (taking into account options realistically available) of the borrower and guarantor ...

There are a number of possible models for estimating the expected loss and capital requirement. Popular pricing models for this approach work on the premise that financial guarantees are equivalent to another financial instrument and pricing the alternative, for example, treating the guarantee as a put option and using option pricing models, credit default swap pricing models, etc. For instance, publicly available data of credit default swaps spreads may be used to approximate the default risk associated to the borrowing and, therefore, the guarantee fee. When using this type of data, the identification of the default event (e.g. bankruptcy) is central to the comparability analysis between the controlled transaction and the potentially comparable credit default swap (See Section C.1.2, on the reliability of credit default swap data) ...

This method aims to quantify the additional risk borne by the guarantor by estimating the value of the expected loss that the guarantor incurs by providing the guarantee (loss given default). Alternatively the expected cost could be determined by reference to the capital required to support the risks assumed by the guarantor ...

The result of this analysis sets a maximum fee for the guarantee (the maximum amount that the recipient of the guarantee will be willing to pay), namely, the difference between the interest rate with the guarantee and the interest rate without the guarantee but with the benefit of implicit support (and taking into account any costs). The borrower would have no incentive to enter into the guarantee arrangement if, in total, it pays the same to the bank in interest and to the guarantor in fees as it would have paid to the bank in interest without the guarantee. Therefore this maximum fee does not of itself necessarily reflect the outcome of a bargain made at arm’s length but represents the maximum that the borrower would be prepared to pay ...

The benefit of implicit support will be the difference between the borrowing terms attainable by the borrowing entity based on its credit rating as a member of the MNE group and those attainable on the basis of the stand-alone credit rating it would have had if it were an entirely unaffiliated enterprise. If the borrower has its own independent credit rating from an unrelated credit rating agency, this will usually reflect its membership of the MNE group and so ordinarily no adjustment would be needed to this credit rating to reflect implicit support ...

The 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 a result of the guarantee. In determining the extent of the benefit provided by the guarantee, it is important to distinguish the impact of an explicit guarantee from the effects of any implicit support as a result of group membership. See Example 2 at paragraph 1.187. The benefit to be priced is not the difference between the cost to the unguaranteed borrower on a stand-alone basis and the cost with the explicit guarantee but the difference between the cost to the borrower after taking into account the benefit of any implicit support and the cost with the benefit of the explicit guarantee ...

This approach quantifies the benefit that the guaranteed party receives from the guarantee in terms of lower interest rates. The method calculates the spread between the interest rate that would have been payable by the borrower without the guarantee and the interest rate payable with the guarantee. The first step is to determine the interest rate that would have been payable by the borrower on its own merits, taking into account the impact of implicit support as a result of its group membership. See Section C.1.2 ...

An independent entity providing a financial guarantee would expect to receive a fee to compensate it for the risk it is taking in accepting the contingent liability and to reflect any value it is providing to the borrower in respect of the guarantee. However, it must be borne in mind that an independent guarantor’s charges will in part reflect costs incurred in the process of raising capital and in satisfying regulatory requirements. Those are costs which associated enterprises might not incur ...

The difficulty with using the CUP method is that publicly available information about a sufficiently similar credit enhancing guarantee is unlikely to be found between unrelated parties given that unrelated party guarantees of bank loans are uncommon ...

In considering whether controlled and uncontrolled transactions are comparable, regard should be had to all the factors which may affect the guarantee fee including: the risk profile of the borrower, terms and conditions of the guarantee, term and conditions of the underlying loan (amount, currency, maturity, seniority etc.), credit rating differential between guarantor and guaranteed party, market conditions, etc. When available, uncontrolled guarantees are the most reliable comparable to determine arm’s length guarantee fees ...

The CUP method could be used where there are external or internal comparables; independent guarantors providing guarantees in respect of comparable loans to other borrowers or where the same borrower has other comparable loans which are independently guaranteed ...

This section describes a number of pricing approaches for those circumstances where a guarantee is found to be appropriate. However, when the accurate delineation of the actual transaction indicates that the purported guarantee is not a guarantee, other pricing approaches should be considered, in particular the guidance in Chapter VII. As in any other transfer pricing situation, the selection of the most appropriate method should be consistent with the actual transaction as accurately delineated, in particular, through a functional analysis. (See Chapter II) ...

Likewise, the financial capacity of the guarantor to meet its obligations requires an analysis of the correlation between the guarantor’s and borrower’s businesses. In situations where the guarantor and the borrower operate under similar market conditions, an adverse market event that affects the performance of the borrower and increases its risk of default might also affect the guarantor and its capacity to fulfill its obligations ...

A lender would benefit from the stronger credit rating of the guarantor (compared to the borrower’s credit rating) and/or the guarantor’s asset pool (in addition to the borrower’s asset pool), and the borrower accordingly may expect a benefit in the form of a lower interest rate. Thus, based on facts and circumstances, a guarantee may provide a benefit to the borrower that has the same or higher credit rating as the guarantor, if the guarantee effectively allows the lender to access wider recourse and, therefore, reduces the interest rate despite the guarantor not having a higher credit rating. In determining the credit rating of the guarantor and the borrower, the effect of implicit support must be considered as explained in Section C.1.1 ...

The examination of financial guarantees under accurate delineation needs also to consider the financial capacity of the guarantor to fulfill its obligations in case of default of the borrower. This requires an evaluation of the credit rating of the guarantor and the borrower, and of the business correlations between them ...

A 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 debt facilities can include the default of another MNE group member as an event that may cause the termination of a facility or other adverse consequences. Other legal, financial or operational ties may mean that it would not be possible to abandon the borrower if it encounters financial difficulty without the MNE group suffering a credit rating downgrade. Any of these circumstances may produce the practical result that MNE group members are financially interdependent quite apart from any formal guarantee arrangement, so that the economic risk of the guarantor may not change materially on it giving an explicit guarantee. In other words, the formal guarantee may represent nothing more than an acknowledgement that it would be detrimental to the interests of the MNE group not to support the performance of the borrower. In such circumstances the guaranteed borrower is not benefitting beyond the level of credit enhancement attributable to the implicit support of other MNE group members and no guarantee fee would be due ...

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 ...

Where the effect of a guarantee is to permit a borrower to borrow a greater amount of debt than it could in the absence of the guarantee, the guarantee is not simply supporting the credit rating of the borrower but could be acting both to increase the borrowing capacity and to reduce the interest rate on any existing borrowing capacity of the borrower. In such a situation there may be two issues – whether a portion of the loan from the lender to the borrower is accurately delineated as a loan from the lender to the guarantor (followed by an equity contribution from the guarantor to the borrower), and whether the guarantee fee paid with respect to the portion of the loan that is respected as a loan from the lender to the borrower is arm’s length. The conclusion of an analysis of such transactions may be, taking into account the full facts and circumstances, that the evaluation of the guarantee fee should be limited to a fee on the portion that has been accurately delineated as a loan, and the remainder of the loan granted should be regarded as effectively a loan to the guarantor followed by an equity contribution by the guarantor to the borrower ...

Alternatively, Chapter I analysis may indicate that the purported financial guarantee is not providing any benefit to the borrower but merely recognising the benefit that the guaranteed party would have obtained in any case by being part of the MNE group. In such situations, based on facts and circumstances, an unrelated enterprise in comparable circumstances would be unwilling to pay for the provision of a financial guarantee, and the guarantor would be found as providing no more than an administrative service to the borrower (see paragraph 10.164 and guidance in Chapter VII) ...

Where 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 guarantee, its cost of borrowing with the guarantee (including the cost of the guarantee and any associated costs of arranging the guarantee) would be measured against its non-guaranteed cost of borrowing, taking into account any implicit support. Borrowing with a guarantee might also affect terms and conditions of the loan other than price; each case will depend on its own facts and circumstances ...

From the perspective of a lender, the consequence of one or more explicit guarantees is that the guarantor(s) are legally committed; the lender’s risk would be expected to be reduced by having access to the assets of the guarantor(s) in the event of the borrower’s default. Effectively, this may mean that the guarantee allows the borrower to borrow on the terms that would be applicable if it had the credit rating of the guarantor rather than the terms it could obtain based on its own, non-guaranteed, rating. The principles and methodologies of pricing a guarantee in these circumstances are similar to those explained for loan pricing in Section C.1.2 ...

From the borrower perspective, a financial guarantee may affect the terms of the borrowing – for instance, the existence of a guarantee may allow the guaranteed party to obtain a more favourable interest rate since the lender has access to a wider pool of assets –, or the amount of the borrowing – for instance, enabling the borrower to access a larger amount of funds ...

The 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 ...

In general, a financial guarantee provides for the guarantor to meet specified financial obligations in the event of a failure to do so by the guaranteed party. There are various terms in use for different types of credit support from one member of an MNE group to another. At one end of the spectrum is the formal written guarantee and at the other is the implied support attributable solely to membership in the MNE group. In the context of this section, a guarantee is a legally binding commitment on the part of the guarantor to assume a specified obligation of the guaranteed debtor if the debtor defaults on that obligation. The situation likely to be encountered most frequently in a transfer pricing context is that in which an associated enterprise (guarantor) provides a guarantee on a loan taken out by another associated enterprise from an unrelated lender ...

A guarantee from another party may be used to support the borrower’s credit. A lender placing reliance on a guarantee or guarantees would need to evaluate the guarantor(s) in a similar way to that in which it evaluates the original borrower. For the lender to take a guarantee into account in setting or adjusting the terms and conditions of a loan, it would need to be reasonably satisfied that the guarantor(s) would be able to meet any shortfall resulting from the borrower being unable to meet its obligations in full in the event of a default. Guarantees are discussed in more detail in Section D ...

The facts relating to S’s credit standing and borrowing power are identical to those in the preceding example. S borrows EUR 50 million from Bank A. The functional analysis suggests that Bank A would lend to S at an interest rate applicable to A rated borrowers without any formal guarantee. However, P agrees to guarantee the loan from Bank A in order to induce Bank A to lend at the interest rate that would be available to AAA rated borrowers. Under these circumstances, S should be required to pay a guarantee fee to P for providing the express guarantee. In calculating an arm’s length guarantee fee, the fee should reflect the benefit of raising S’s credit standing from A to AAA, not the benefit of raising S’s credit standing from Baa to AAA. The enhancement of S’s credit standing from Baa to A is attributable to the group synergy derived purely from passive association in the group which need not be compensated under the provisions of this section. The enhancement of S’s credit standing from A to AAA is attributable to a deliberate concerted action, namely the provision of the guarantee by P, and should therefore give rise to compensation. (Example 2 should not be viewed as providing comprehensive transfer pricing guidance on guarantee fees in respect of financial transactions. For further guidance on the transfer pricing aspects of financial transactions, see Chapter X of these Guidelines.) ...

At issue was whether a payments for an intra group loan guarantee was deductible. In 2008 an agreement was concluded between Verbund AG and the former Albanian Ministry of Economy, Trade and Energy, with the object of construction, operation, maintenance and transfer of the project of a new hydropower plant in Ashta. Based on this agreement, the local company Energji Ashta received a loan in the amount of 140 million euros from two Austrian banks. Having no assets to guarantee the loan, the foreign banks have accepted guarantees for the fulfillment of obligations by Energji Ashta from two group companies EVN AG and Verbund AG. The guarantee for Energji Ashta was made against a commission of 2% of the disbursed amount. Following a tax audit Energji Ashta was informed that the commission paid to EVN AG and Verbund AG would not be allowed as a deductible expense. Not agreeing with the above decision Energji Ashta appealed. Judgement of the Supreme Administrative Court The Court set aside the assessment of the tax authorities and decided in favor of Energji Ashta. Excerpt “In the dispute under trial, the plaintiff [Energji Ashta] essentially opposes judicially, the non-recognition as a deductible expense of the credit commission. It turns out that “non-recognition of the credit commission” is not materialized in the act/action of the tax administration, from which it has been derived or has created legal consequences for the plaintiff. As the courts of fact rightly reason, the opinions of tax inspectors or the Tax Appeals Directorate do not constitute the official position of the public body, much less produce consequences for the plaintiff. In the conditions where the facility (hydropower plant) is in the investment phase and has not yet produced tax effects for the plaintiff, the latter can not challenge the still unborn tax liabilities which are not based on notice concrete estimates.” Click here for other translation ...

A GmbH provided funding in the form of a clearing account to its Belgian subsidiary. The account was unsecured and carried an interest of 6% p.a. In 2005, A GmbH and the Belgian company agreed on a debt write-off which was deducted for tax purposes. The tax authorities issued an assessment where the write-off was denied as a tax deductible expense. According to the tax authorities, independent third parties would have agreed on some kind of security. The lack thereof was a violation of the arm’s length principle. A GmbH brought the assessment to court. The Federal Fiscal Court (I R 73/16) found the assessment of the tax authorities to be lawful. This decision was then appealed to the Constitutional Court by  A GmbH, alleging violation of the general principle of equality as well as a violation of its fundamental procedural right to the lawful judge. Decision of the Constitutional Court The Federal Constitutional Court decided in favour of A GmbH and found the constitutional complaint well-founded. “…the decision of the Federal Fiscal Court violates the complainant’s fundamental procedural right to the lawful judge (Article 101.1 sentence 2 of the Basic Law) due to the way it chooses to handle its obligation to make a reference pursuant to Article 267.3 TFEU.” Click here for English translation ...

In this case the Third Circuit of Appeal upheld the tax courts prior decision i a $377 million dispute involving the affiliate of a US based commodities trader. The Court found that SIH Partners LLLP, an affiliate of Pennsylvania-based commodities trader Susquehanna International Group LLP, owed taxes on approximately $377 million in additional income. The extra earnings stemmed from a $1.5 billion loan from Bank of America brokerage Merrill Lynch, which was guaranteed by SIH’s subsidiaries in Ireland and the Cayman Islands. The Tax Court’s ruling was based on regulations under Section 956 of the Internal Revenue Code, which states that U.S. shareholders must include their controlled foreign corporations’ applicable earnings, up to the amount of such a loan, in their own income when the foreign units invest in U.S. property ...

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp. z o.o. be obliged to disclose the event related to the free-of-charge consideration received in a simplified CIT/TP report, both for the year in which the guarantee is granted and for subsequent tax years during which the guarantee is in effect. In A. Sp. z o.o.’s opinion, the company was not obliged to prepare transfer pricing documentation in connection with the gratuitous service received. And if the tax authority’s decision was contrary to the Company’s position, documentation should be prepared only for the tax year in which the guarantees was entered. The tax authorities disagreed with the company, and a complaint was filed by A. Sp. Z o.o. with the Administrative Court. Judgement of the Administrative Court The court dismsissed the appeal of A. Sp. z o.o. and sided with the tax authorities. Excerpt “The essence of the dispute in this respect boils down to the understanding of the notion of transaction used in this provision to define the actions the performance of which is to result in the necessity to draw up tax documentation. The provisions of ustawa p.d.o.p. do not contain a legal definition of this notion, therefore, the basis for interpretation of its meaning must be a colloquial understanding of the word transaction. However, basing such an interpretation solely on lexical definitions is doomed to failure because both the interpreter himself, as well as the applicant, basing themselves on linguistic definitions contained in dictionaries, came to completely different conclusions from the point of view of interpretation. One of them concluded that a transaction is a legal act concluded in connection with a party’s business activity in the performance of which at least one payment is made (based on the Internet Dictionary of the Polish Language http://sjp.pl), while the applicant, relying on another dictionary https://sjp.pwn.pl), argued that the word transaction covers only an agreement for the purchase and sale of goods and services. Therefore, resolving the merits of the case based solely on dictionary concepts does not give sufficiently satisfactory results. n such a situation one should refer to a purposeful interpretation, referring to the reasons for introducing this regulation, as well as to the goal the legislator intended to achieve through its introduction. In this respect, it should be pointed out that the provisions on the obligation to prepare tax documentation in the case of civil law transactions between related entities were introduced in order to ensure transparency of such activities, in particular to ensure that such activities are conducted on market principles. The purpose of introducing such a regulation convinces the court to accept as correct a broad definition of the word transaction. Such a definition ensures transparency of actions by related entities. There are no grounds for assuming that the legislator intended to achieve this only with respect to purchase and sale agreements, leaving the entire wide range of possible legal actions between related entities outside these regulations. Such an understanding of this provision is also an implementation of the guarantee function of the tax law, allowing related entities to obtain adequate protection in the event of disclosure of their actions. Therefore, in the court’s opinion, the interpreting authority did not violate the law by stating that the applicant’s position in this respect, in which it assumes that the notion of transaction means only and exclusively sale and purchase agreements, is incorrect. In this respect, the court of first instance fully agrees with the view of the Supreme Administrative Court expressed in the judgment of 8 March 2016 in case II FSK 4000/13, which stated that on the grounds of Article 9a(1) and (2) of the Act, the term “transaction” is synonymous with the term “agreement”. (ONSAiWSA 2017/3/52). In the same judgment, this Court considered as transactions within the meaning of Article 9a(1) of the P.C.P. making a contribution-in-kind to a capital company in the form of shares or stocks, the purchase (acquisition) of shares or taking up shares in increased share capital in exchange for a cash contribution. Cash-pooling agreements were also recognised as agreements exhausting the notion of transaction indicated in Article 9(1) of the APS (e.g. judgment of the Supreme Administrative Court of 8 January 2019 II FSK 121/17) or taking up by a bank in exchange for a cash contribution of shares issued upon the establishment of a mortgage bank and subsequent increases in the share capital of a mortgage bank (judgment of the WSA in Gliwice of 25 April 2018 I SA/Gl 314/18). Thus, the court jurisprudence in this respect adopts a broad understanding of the notion of transaction, not limiting it only to a sale-purchase agreement. Taking into account all the elements indicated above, the court held that the authority did not infringe the law by assuming that the notion of transaction referred to in Article 9a(1) of the A.P.C. also includes a legal transaction such as the one described in the application, which is subject to the granting of a surety free of charge to the applicant under a loan agreement. The interpreter’s position does not violate the law either, to the extent in which he stated that the obligation to prepare tax ...

G-Lender GmbH, owned 50% of Austrian company A GmbH. The remaining 50% of the shares in A GmbH were held by non related shareholders, who at the same time acted as managing directors of A GmbH. G-Lender GmbH granted A GmbH a total of five loans. These loans each carried an interest rate of  5.5% pa. Assets owned by A GmbH  were assigned as collateral. On 22 January 2002 and 16 June 2002, A GmbH made a partial payments on the loans to G-Lender. By a contract dated 9 April 2003, G-Lender GmbH provided a guarantee to an independent bank for a EUR 800,000 loan to A GmbH and at the same time declared subordination of its loan claims against A GmbH. Due to negative development in A GmbH, G-Lender GmbH on 31 December 2003, booked a partial depreciation on the loan in the amount of EUR 312.972. In December 2004 bankruptcy proceedings had been opened on A GmbH and the guarantee of G-Lender GmbH was claimed by B Bank. G-Lender GmbH formed a provision for liabilities an in addition wrote off the residual value of the loans to A GmbH. The German Tax Authorities disallowed the deductions from the loan guarantee. Judgment of the Bundesfinanzhof The case was remanded to the lower court for a final decision. The Court reaffirmed its view from a prior ruling in I R 73/16 scope of the correction in Article 9(1) OECD also allows the profit adjustments due to non recognition of a loan claim or a write-down on the loan value. According to the Court, loans provided without collateralisation can – depending on facts and circumstances – be at arm’s length within the meaning of Section 1 (1) AStG and Article 9 OECD-MA. The Court did not find the assessments under Section 1 AStG restricted by EU law based on the ruling in the ECJ case Hornbach Baumarkt (guarantee for a subsidiary in need of restructuring). Click here for English translation Click here for other translation ...

Waiver KG had an outstanding (non-interest-bearing and unsecured) trade receivable of EUR 2,560,000 from a wholly-owned subsidiary in China related to deliveries made in FY 2004 and 2005. Waiver KG had first issued a partial waiver (EUR 560,000) on the receivable and then a complete waiver in December 2008, after a partial write-down had previously been made in the commercial balance sheet. The initial partial write-down had not been given effect to the taxable income, but in the course of a tax audit Waiver AG requested that the partial write-off be taken into account for tax purposes as well. The tax office refused to do so and instead applied an interest rate of 3% on the outstanding receivable. A complaint was then filed by Waiver KG to the tax court. The tax court issued a decision in favour of Waiver KG with reference to German jurisprudence on the blocking effect of Art. 9 OECD-MA. However, at the same time, the tax court increased the interest rate on the outstanding receivable to 10.5%. This decision was appealed to the Bundesfinanzhof by the tax authorities. Judgement of the Bundesfinanzhof The Court found that Art. 9 (1) OECD-MA does not limit arm’s length adjustments within the scope of Sec. 1 (1) AStG to so-called price adjustments, but also allowed for tax adjustments based on non-recognition of a loan receivable or a partial write-downs. The Court considers that lack of collateral can be at arm’s length, depending on facts and circumstances of the transaction in question. The case was referred back to the tax court, as it had not been sufficiently clarified whether a independent party would have waived collateral in the specific case, e.g. in order to avoid the bankruptcy of a functionally important company. Click here for English translation Click here for other translation ...

It follows from various Supreme Court judgments in the Netherlands that a loan is commercially irrational if no interest can be determined under which an independent third party would have been willing to grant the same loan. The consequence of a loan beeing deemed commercially irrational is that a loss is not deductible. This case addresses the implications of the Umbrella Judgement, in particular the question of how that judgment relates to case laws on unsecured loans and guarantees. The Advocate General concludes that the Umbrella Judgment is not applicable in this case and that the tax authorities has failed to demonstrate that an independent third party would not have been willing to enter a similar loan agreement. Click here for translation ...

In the Hornbach-Baumarkt case, a German parent company guaranteed loans of two related companies for no remuneration. The German tax authorities made an assessment of the amount of income allocated to the parent company as a result of the guarantee, based on the fact that unrelated third parties, under the same or similar circumstances, would have agreed on a remuneration for the guarantees. Hornbach-Baumarkt argued that German legislation was in conflict with the EU freedom of establishment and lead to an unequal treatment of domestic and foreign transactions since, in a case involving german domestic transactions, no corrections to the income would have been made for guarantees granted to subsidiaries. The company further argued that the legislation is disproportionate to achieving the objectives as it provides no opportunity for the company to present commercial justification for the non-arm’s-length transaction. The German Court requested a preliminary ruling from the European Court of Justice on these arguments. In May 2018 The European Court of Justice concluded that German transfer pricing legislation is consistent with EU freedom of establishment. Moreover, the Court ruled, that a parent company’s position as a shareholder of a non-resident company may be taken into account in determining whether there is sufficient commercial justification for a non-arm’s length related-party transaction. The Court further stated that transfer pricing legislation inherently constitutes a restriction to the freedom of establishment. However, this restriction can be justified by the need to preserve a balanced allocation of taxing rights between the Member States. The goal of the transfer pricing legislation is to prevent profit shifting via transactions that are not in accordance with market conditions. German legislation does not go beyond what is necessary to attain the objectives relating to the need to maintain the balanced allocation of the power to tax between the Member States and to prevent tax avoidance, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that transaction. The Court concluded that the income adjustment made by the German tax authorities was limited to the portion of the income which exceeded what would have been agreed between unrelated companies. The concept of Commercial justification may include economic reasons resulting from the very existence of a relationship of interdependence between the parent company resident in the Member State concerned and its subsidiaries which are resident in another Member State. A parent company has sufficient commercial reason to provide capital on non-arm’s-length terms to a subsidiary when a subsidiary lacks sufficient equity capital to expand. Therefore, the Court stated that comfort letters containing a guarantee free of any remuneration might be commercially justified because the parent company is a shareholder of the foreign group companies, which would justify the transaction at issue under non-arm’s-length terms. The opinion of the Advocate General was issued December 2017. European Court of Justice Judgment in Hornbach-Baumarkt case, Case No C-382/16 ...

The facts relating to S’s credit standing and borrowing power are identical to those in the preceding example. S borrows EUR 50 million from Bank A. The functional analysis suggests that Bank A would lend to S at an interest rate applicable to A rated borrowers without any formal guarantee. However, P agrees to guarantee the loan from Bank A in order to induce Bank A to lend at the interest rate that would be available to AAA rated borrowers. Under these circumstances, S should be required to pay a guarantee fee to P for providing the express guarantee. In calculating an arm’s length guarantee fee, the fee should reflect the benefit of raising S’s credit standing from A to AAA, not the benefit of raising S’s credit standing from Baa to AAA. The enhancement of S’s credit standing from Baa to A is attributable to the group synergy derived purely from passive association in the group which need not be compensated under the provisions of this section. The enhancement of S’s credit standing from A to AAA is attributable to a deliberate concerted action, namely the provision of the guarantee by P, and should therefore give rise to compensation. ((Example 2 should not be viewed as providing comprehensive transfer pricing guidance on guarantee fees in respect of financial transactions. Further guidance will be provided on transfer pricing for financial transactions including identifying the economically relevant characteristics for determining arm’s length conditions. This work will be undertaken in 2016 and 2017.) ...

C-GmbH was the sole shareholder of I-GmbH. In 2000, I-GmbH, together with another company, set up a US company for the development of the US market, H-Inc., in which the I-GmbH held 60 per cent of the shares. H-Inc. received equity from the two shareholders and also received a bank loan of approx. $ 1.5 million (USD), which the shareholders secured through guarantees. As of December 31, 2003, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. 950,000 USD. On June 30 , 2004,  I-GmbH became the sole shareholder of H-Inc. Then the bank put the H-Inc. granted loans due. Since H-Inc. was not able to serve the bank loan, C-GmbH paid the bank. As of December 31, 2004, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. $ 450,000 , which at December 31 , 2005 amounted to approx. $ 1.6 million, as at 31 December 2006 $ 2.5 million and at December 31, 2007 USD 3.5 million. During the years 2004 to 2007, the I-GmbH granted its US subsidiary 5% interest-bearing, unsecured loans of € 261,756.22 (2004), € 1,103,140 (2005), € 158,553.39 (2006) and € 75,000 (2007) resulting from the liquidity of future profits of H-Inc. should be repaid. Loan receivables were subject to individual value adjustments already in the respective year of their commitment (2004: € 261,052, 2005: € 1,103,140, ​​2006: € 158,000, 2007: € 75,000). In judgment of 17 December 2014, the German Tax Court stated, with reference to its judgment of 11 October 2012, IR 75/11, that the treaty principle of “dealing At arm’s length ” have a blocking effect on the so-called special conditions. The relevant test according to Article 9 (1) of the DTC-USA 1989, which corresponds in substance to Article 9 (1) of the OECD Model Agreement, could only include those circumstances that have an effect on agreed prices. The concept of agreed conditions in Article 9 (1) of the OECD-Model Agreement should, in principle, include everything which is the subject of commercial and financial relations and therefore the subject of contractual exchange between affiliated undertakings, so that both the price and all other terms and conditions should be included. Following these decisions, on 30 March 2016, the Federal Ministry of Finance issued a non-application decree stating that Article 9 of the OECD Model Tax Convention does not refer to a transfer price adjustment but to a profit adjustment. According to the decree the principles of the above decisions are not to be applied beyond the decided individual cases. Se also the later decision from the German Tax Court I R 29/14. Click here for English translation Click here for other translation ...

In the French Carrefour case, the French Supreme Administrative Court considered a rate of 0.25% for a loan guarantee to be at arm’s length. According to the Court, the remuneration should be commensurate with the risk incurred as well as with the market value of this service, irrespective of the actual cost. Click here for English translation Click here for other translation ...

Article 9 of the Franco-Brazilian Tax Convention of 10 September 1971 contains provisions according to which, in the case of companies that are not at arm’s length from each other, profits that have been transferred directly or indirectly by a company of one of the contracting States to a company of the other contracting State may be included in the profits of the first company and taxed accordingly. It is clear from these provisions that they allow the administration of the State to which an enterprise which, by virtue of its situation and operations, falls within their scope belongs, to apply the domestic tax law. On the basis of the provisions of Article 57 of the CGI, the administration reintegrated into the company’s results subject to corporate income tax the commissions, evaluated at the rate of 0.50%, that the company should have received as remuneration for the guarantees that it had granted to its Brazilian subsidiary as a guarantee for loans contracted by the latter with a French bank. Excerpt from the Judgement “.. Considering that the company “LAINIERE DE PICARDIE” justifies that the loans taken out by the Brazilian company “Intece” with a French bank and which it guaranteed allowed a significant development of its sales to the Brazilian company during the years mentioned above; that, consequently, the company “LAINIERE DE PICARDIE” must, in the circumstances of the case, be considered as providing proof that the apparent liberality that it granted by waiving the payment of a commission by its subsidiary in remuneration of the service that it rendered to it had a direct counterpart in accordance with the safeguarding of its own commercial interest and, consequently, did not constitute an indirect transfer of profits abroad within the meaning of the aforementioned article 57 of the general tax code” Click here for English translation Click here for other translation ...