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.
TPG2022 Chapter X paragraph 10.185
Category: D. Financial guarantees, TPG2022 Chapter X: Transfer pricing aspects of financial transactions | Tag: Accurate delineation, Example - financial guarantees, Example 1 - implicit support, Financial guarantee, Financial transactions, Implicit support/guarantee, Loan guarantee, Passive association, Treasury functions
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- 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...
- 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...
- 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...
- TPG2022 Chapter X paragraph 10.176The 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...
- 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...
- TPG2022 Chapter X paragraph 10.174This 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...
Related Case Law
- France vs Carrefour, February 1992, Supreme Administrative Court no 81690/82782In 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...
- Belgium vs R.B. NV, June 2023, Court of First Instance, Case No. 2021/2991/AR.B. NV had entered into a loan agreement with a group company in Switzerland. The interest rate on the loan had been determined by applying the method used by the credit agency, Standard & Poor’s. Moreover, it had been concluded that R.B. NV...
- Netherlands vs “Tobacco B.V.”, December 2023, North Holland District Court, Case No AWB – 20_4350 (ECLI:NL:RBNHO: 2023:12635)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...