There may be less information asymmetry between entities (that is, better visibility) in the intra- group context than in situations involving unrelated parties. Intra-group lenders may choose not to have covenants on loans to associated enterprises, partly because they are less likely to suffer information asymmetry and because it is less likely that one part of an MNE group would seek to take the same kind of action as an independent lender in the event of a covenant breach, nor would it usually seek to impose the same kind of restrictions. Where there is an absence of covenants in any written agreement between the parties, it will be appropriate to consider under Chapter I guidance whether there is, in practice, the equivalent of a maintenance covenant between the parties and the consequential impact upon the pricing of the loan.
TPG2022 Chapter X paragraph 10.86
Category: C. Treasury function, TPG2022 Chapter X: Transfer pricing aspects of financial transactions | Tag: Absence of covenants, Covenants, Financial transactions, Information asymmetry, Intra-group loan, Loan, Treasury functions, Written Agreement/Contract
« Prev |
Next » Related Guidelines
- TPG2022 Chapter X paragraph 10.85Maintenance covenants refer typically to financial indicators which have to be met at regular, predetermined intervals during the life of a covenanted loan. Maintenance covenants can act as an early warning system so that in the event of financial underperformance by the borrower,...
- TPG2022 Chapter X paragraph 10.84Incurrence covenants require or prohibit certain actions by the borrower without the consent of the lender. Incurrence covenants may, for example, prohibit the borrower from taking on additional debt, creating any charge on the assets of the entity or disposing of particular assets...
- TPG2022 Chapter X paragraph 10.83The purpose of covenants in a loan agreement is generally to provide a degree of protection to the lender and so limit its risk. That protection may be in the form of incurrence covenants or maintenance covenants....
- TPG2022 Chapter X paragraph 10.81It is also important to note that although there are established approaches to estimate a credit rating for a particular group member or debt issuance, the considerations detailed above mean that a pricing approach based on the separate entity credit ratings that are...
- TPG2022 Chapter X paragraph 10.108Such an approach would represent a departure from an arm’s length approach based on comparability since it is not based on comparison of actual transactions. Furthermore, it is also important to bear in mind the fact that such letters do not constitute an...
- TPG2022 Chapter X paragraph 10.105In their most common variation, economic models calculate an interest rate through a combination of a risk-free interest rate and a number of premiums associated with different aspects of the loan – e.g. default risk, liquidity risk, expected inflation or maturity. In some...
- September 2017: Transfer Pricing Risk Assessment in the Mining IndustryThe African Tax Administration Forum (ATAF) and the German Federal Ministry for Economic Cooperation and Development (BMZ), through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, have developed this toolkit for African tax authorities seeking to assess transfer pricing risk in the mining...
- July 2017: ATO guidance on related party financing arrangementsThe Practical Compliance Guideline (Guideline) from the ATO outlines the compliance approach to the taxation outcomes associated with a ‘financing arrangement’, as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or a related transaction or contract, entered into...
Related Case Law
- Peru vs. Telefonica, July 2019, Supreme Court, Case No 11111-2016, LimaTelefónica brought before the Supreme Court of Peru the following issues related to a long lasting dispute with SUNAT – the Peruvian tax authorities: 1: Financial Charges – Carve Out 2: Withdrawal of assets of majority shareholder Telefónica del Perú S.A.A. 3: Depreciation...
- Poland vs L S.A, June 2019, Supreme Administrative Court, Case No. II FSK 1808/17 – Wyrok NSAA Polish subsidiary in a German Group had taken out a significant inter-company loan resulting in a significantly reduced income due to interest deductions. At issue was application of the Polish arm’s length provisions and the arm’s length nature of the interest rate...
- Poland vs Cash Pool B sp z.o.o., November 2019, Supreme Administrative Court, Case No II FSK 3798/17At issue in this case was whether a deposit in a cash pool constituted a loan. According to the company, cash transfers made as part of cash pooling cannot be considered a loan agreement because they do not contain elements that are material...
- Poland vs Q. F. sp. z o.o., January 2021, Supreme Administrative Court, Case No II FSK 2514A request for an interpretation was submitted by a company in regards to financial transactions (loans and guarantees) with related parties. The requested interpretation was relevant in determining the amount of the controlled transactions and on that basis whether the taxpayer was required...
- Finland vs A Oyj, May 2021, Supreme Administrative Court, Case No. KHO:2021:66A Oyj was the parent company of the A-group, and responsible for the group’s centralised financial activities. It owned the entire share capital of D Oy and B Oy. D Oy in turn owned the entire share capital of ZAO C, a Russian...