Transfer Pricing

Intercompany Financing Transactions

Intercompany Financing Transactions

Drawing on combined expertise from NERA's Global Transfer Pricing and Securities and Finance Practices, NERA's economists use advanced analytical techniques to provide robust solutions that help taxpayers in determining arm’s length pricing for financial transactions. Our capabilities in this field uniquely position us to manage transfer pricing risk and deliver value to our clients. NERA’s capabilities span all areas of intercompany finance, including loan and guarantee pricing, structured finance and leasing, and thin capitalization and treasury services.

Loans Guarantees

Pricing of intercompany guarantees is becoming one of the most contentious issues in transfer pricing. NERA's expertise in calculating shadow credit ratings, or confirming actual ratings where they already exist, has been developed through extensive work on assignments involving intercompany loans and guarantees. NERA's capabilities in this area include the use of the following methods:

  • Capital infusion—determining the capital infusion needed to bring a related party’s credit rating in line with that of the guarantor's, and then calculating the cost of capital associated with this infusion.
  • Expected loss—calculating the value of a guarantee by multiplying the nominal amount guaranteed by the probability of default and making adjustments to account for the expected rate of recovery. There are a variety of methods that can be used to determine the premium that should be applied to this figure to compensate the guarantor for its cost of capital and risk, including the Capital Asset Pricing Model (CAPM).
  • Credit default swap (CDS) benchmarking—establishing an arm's length range for a guarantee fee by reference to available market data on CDS, making adjustments as necessary to reflect economic conditions, and the scope, terms, and conditions of the specific nature of the guarantee provided. If CDS market data are not available, the latest CDS pricing models can be used to generate an arm’s length estimate of the guarantee fee.
  • Counterfactual debt pricing—determining the interest rates or bond premiums related parties would be charged in the absence of a parental guarantee, as well as conducting profit split analyses to determine what proportion of interest savings should be paid to the guarantor as a fee.

Structured Finance

Structured finance refers to financial arrangements that effectively increase access to liquidity and reduce the cost of capital for a borrower. NERA's relevant expertise in this area includes:

  • Advice on transfer pricing issues related to the financial engineering of structured financial instruments.
  • Application of economically sound loan pricing techniques using major financial databases.
  • Pricing of the embedded options in structured financial instruments using the most appropriate pricing models or model combination (e.g., Black Scholes, Cox-Rubinstein Binomial Model, Garman Kohlhagen model).
  • Confirmation of existing credit ratings, or determination of shadow credit ratings where an explicit credit rating is not available.

Thin Capitalization

While safe harbors and prescriptive rules of controlled entity capitalization may apply in some tax jurisdictions, many others adhere to the arm's length principle of determining how much related debt controlled companies can be expected to bear, and what levels of interest cover should be maintained.

The "thin capitalization" questions are frequently examined by tax authorities in the context of requests for advance pricing agreements (APAs) and tax audits, and the challenges faced by taxpayers are compounded by the effects of the financial crisis. Indeed, the drying up of bank lending has prompted tax authorities in some jurisdictions to demand higher levels of interest cover and lower leverage for companies belonging to an affiliated group.

NERA's approach in this area complements basic benchmarking with the use of sophisticated financial modeling to derive an objective, market-based test of capacity to bear debt and meet interest expense. This approach provides clients with economically robust answers and its use has been accepted by tax authorities.

Treasury Services

Recent court cases such as GE Capital Canada v. HMQ in Canada and DSG Retail and others  vs. HMRC in the UK have highlighted the relevance of transfer pricing for corporate treasury functions.
 
It is important that taxpayers have robust policies and processes in place to ensure not only that intercompany financial transactions are carried out at arm’s length, but also that this fact can be convincingly demonstrated to tax authorities. NERA experts provide treasury support services in the following areas:

  • Pricing financial transactions, including those in relation to cash pooling, loans and structured finance, guarantees, leasing, and commodity and currency hedging.
  • Providing analysis of controlled parties' capital structure including defense against allegations of thin capitalization and assisting clients in obtaining APAs, advance rulings, and support for filing positions.
  • Advice on the design and implementation of transfer pricing models that correspond to different treasury service models (e.g., in-house banking and conduit arrangements).
  • Conducting risk assessments and providing recommendations on best practices in transfer pricing for treasury services.
  • Preparation of transfer pricing documentation in line with country-specific regulations and OECD Guidelines.
  • Assisting clients audited by tax authorities in preparing required transfer pricing analyses and/or documentation. Providing experts specializing in financial economics and transfer pricing to support a taxpayer's position in controversy and negotiations with tax authorities.
Name Title Location Phone Email
Dr. Harlow Higinbotham Managing Director Chicago +1 312 573 2803
+86 21 6103 5544
+86 10 6533 4395
harlow.higinbotham@nera.com
Dr. Chudozie Okongwu Managing Director New York City
London
+1 212 345 5003
+44 20 7659 8568
chudozie.okongwu@nera.com
Dr. Sharon Brown-Hruska Director Washington, DC +1 202 466 9222 sharon.brown.hruska@nera.com
Sébastien Gonnet Director Paris
Geneva
+ 33 1 45 02 30 00
+41 22 819 94 94
sebastien.gonnet@nera.com
Dr. Stuart L. Harshbarger Director White Plains, NY +1 914 448 4185 stuart.harshbarger@nera.com
Nihan Mert-Beydilli Associate Director Los Angeles +1 213 346 3035 nihan.mert.beydilli@nera.com
Amanda Pletz Associate Director London
Geneva
+44 20 7659 8528
+41 22 819 94 94
amanda.pletz@nera.com
Tom Braukmann Principal Frankfurt +49 69 710 447 511 tom.braukmann@nera.com
William P. Hrycay Senior Consultant New York City +1 212 345 1518 william.hrycay@nera.com
Guillaume Madelpuech Principal Paris +33 1 70 75 01 58 guillaume.madelpuech@nera.com
Dr. Alexander Voegele Affiliated Consultant Frankfurt +49 69 710 447 501 alexander.voegele.affiliate@nera.com
Title Type Author
Comments on OECD Discussion Draft on the Revised Guidance on Profit Splits Regulatory Filing Emmanuel Llinares, Harlow Higinbotham, Nihan Mert-Beydilli, and Vladimir Starkov
Apple and the CCCTB: Can the European Commission Have Both? Published Article By Dr. Emmanuel Llinares and Guillaume Madelpuech
Economic Analysis for Developing Countries—Comments on the IMF, OECD, UN, and World B... Regulatory Filing By Dr. Vladimir Starkov, Sébastien Gonnet, and Guillaume Madelpuech
Field Tax Audits in Germany Published Article By Dr. Alexander Voegele and Philip de Homont
The take on comparables: A French perspective Published Article By Guillaume Madelpuech
Comments on the OECD Public Discussion Draft on the Attribution of Profits to Permane... Regulatory Filing By. Pim Fris and Guillaume Madelpuech
Separating intangible value by surveys Published Article By Philip de Homont and Alexander Voegele
Risks Redefined in Transfer Pricing Post-BEPS Book By Sébastien Gonnet
Discussion of the Amendments to Chapter IX of the OECD Transfer Pricing Guidelines on... Memo By Pim Fris and Guillaume Madelpuech
Practical treatment of transfer pricing adjustments Published Article By Philip de Homont and Alexander Voegele