In the absence of comparable uncontrolled transactions, the cost of funds approach could be used as an alternative to price intra-group loans in some circumstances. The cost of funds will reflect the borrowing costs incurred by the lender in raising the funds to lend. To this would be added the expenses of arranging the loan and the relevant costs incurred in servicing the loan, a risk premium to reflect the various economic factors inherent in the proposed loan, plus a profit margin, which will generally include the lender’s incremental cost of the equity required to support the loan.
TPG2022 Chapter X paragraph 10.97
Category: C. Treasury function, TPG2022 Chapter X: Transfer pricing aspects of financial transactions | Tag: Borrowing costs of lender, Cost of funds, Cost of funds approach, Financial transactions, Interest rate, Intra-group loan, Loan, Treasury functions
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- TPG2022 Chapter X paragraph 10.99The application of the cost of funds approach requires consideration of the options realistically available to the borrower. On prevailing facts and circumstances, a borrowing MNE would not enter into a transaction priced under the cost of funds approach if it could obtain...
- TPG2022 Chapter X paragraph 10.57Credit 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...
- TPG2022 Chapter X paragraph 10.54An independent lender will carry out a thorough credit assessment of the potential borrower to enable the lender to identify and evaluate the risks involved and to consider methods of monitoring and managing these risks. That credit assessment will include understanding the business...
- TPG2022 Chapter X paragraph 10.98One consideration to be kept in mind with the cost of funds approach is that it should be applied by considering the lender’s cost of funds relative to other lenders operating in the market. The cost of funds can vary between different prospective...
- TPG2022 Chapter X paragraph 10.25When, under accurate delineation, the lender is not exercising control over the risks associated to an advance of funds, or does not have the financial capacity to assume the risks, such risks should be allocated to the enterprise exercising control and having the...
- TPG2022 Chapter X paragraph 10.106The reliability of economic models’ outcomes depends upon the parameters factored into the specific model and the underlying assumptions adopted. In evaluating the reliability of economic models as an approach to pricing intra-group loans it is important to note that economic models’ outcomes...
- 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 10.58Borrowers seek to optimise their weighted average cost of capital and to have the right funding available to meet both short-term needs and long-term objectives. When considering the options realistically available to it, an independent business seeking funding operating in its own commercial...
- Italien Transfer Pricing Guidelines, Ministerial Decree of 14 May 2018, published in the Official Gazette no. 118/2018Italien legislation on transfer pricing is contained in Article 110, paragraph 7 of the Consolidated Income Tax Act, where the first sentence states that “the components of income deriving from transactions with companies not resident in the territory of the State, which directly...
- United Arab Emirates issues comprehensive Transfer Pricing Guide23 October 2023, the United Arab Emirates issued a comprehensive practical Transfer Pricing Guide. The guide is designed to provide general guidance on the Transfer Pricing regime in the UAE with a view to making the provisions of the Transfer Pricing regulations as...
Related Case Law
- Poland vs “Shopping Centre Developer sp.k.”, May 2019, Administrative Court, Case No III SA/Wa 1777/18A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found...
- Netherlands vs X B.V., November 2018, Supreme Court, Case No 17/03918A Dutch company, Lender BV, provided loans to an affiliated Russian company on which interest was paid. The Dispute was (1) whether the full amount of interest should be included in the taxable income in the Netherlands, or if part of the “interest payment” was...
- Sweden vs. Diligentia, June 2010, Regeringsratten case nr 2483-2485-09Diligentia was the parent company of a Group active in real estate. After a take-over of Diligentia by another Group, Skandia Liv, external loans in Diligentia were terminated and replaced with intra-group loans from the new parent company, Skandia Liv. The new loans had an interest rate...
- Greece vs “SH Loan Ltd”, May 2019, Court, Case No A 1780/2019“SH Loan Ltd” had provided a loan to its shareholder/manager and claimed that it did not expect any profit (interest) from this transaction, since it was not a bank. The tax authorities issued an assessment where additional interest income was added to the...