Once the actual transaction has been accurately delineated, arm’s length interest rates can be sought based on consideration of the credit rating of the borrower or the rating of the specific issuance taking into account all of the terms and conditions of the loan and comparability factors.
TPG2022 Chapter X paragraph 10.89
Category: C. Treasury function, TPG2022 Chapter X: Transfer pricing aspects of financial transactions | Tag: Accurate delineation, Comparable uncontrolled price method (CUP), Financial transactions, Interest rate, Intra-group loan, Loan, Treasury functions
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- TPG2022 Chapter X paragraph 10.91The arm’s length interest rate for a tested loan can be benchmarked against publicly available data for other borrowers with the same credit rating for loans with sufficiently similar terms and conditions and other comparability factors. With the extent of competition often present...
- TPG2022 Chapter X paragraph 10.90The widespread existence of markets for borrowing and lending money and the frequency of such transactions between independent borrowers and lenders, coupled with the widespread availability of information and analysis of loan markets may make it easier to apply the CUP method to...
- 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...
- TPG2022 Chapter X paragraph 10.103Accordingly, the use of credit default swaps to approximate the risk premium associated to intra- group loans will require careful consideration of the above-mentioned circumstances to arrive at an arm’s length interest rate....
- TPG2022 Chapter X paragraph 10.102As financial instruments traded in the market, credit default swaps may be subject to a high degree of volatility. This volatility may affect the reliability of credit default swaps as proxies to measure the credit risk associated to a particular investment in isolation,...
- 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
- 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...
- Bulgaria vs “K-Bul”, March 2016, Supreme Administrative Court, Case No 2690K-Bul is a Bulgarian subsidiary in the K Group. In the years 2007 to 2013 certain financial intra-group contracts were entered (Two financial service contract – concluded on 02.10.2007 and a Loan agreement concluded on 26.01.2010). Following an audit, the market interest rate...
- Norway vs Petrolia Noco AS, May 2022, Court of Appeal, Case No LB-2022-18585In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan...
- Portugal vs “Caixa… S.A.”, February 2024, Tribunal Central Administrativo Sul, Case No 866/12.1 BELRS“Caixa… S.A.” received an assessment of additional taxable income in which, among other things, the (lack of) interest on a loan granted to a subsidiary had been adjusted by the tax authorities. Caixa S.A. lodged an appeal with the Tribunal Central Administrativo Sul....
- Italy vs SGL CARBON SPA, September 2013, Supreme Court 22010SGL CARBON SPA paid interest on loans received from the German parent of the SGL Group. The tax authorities considered, that the interest rate applied to the intra-group loan was significantly higher than the average interest rate applied in the German market. SGL...