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. Yves Hervé Managing Director Frankfurt +49 69 710 447 508
Dr. Harlow Higinbotham Managing Director Chicago +1 312 573 2803
+86 21 6103 5544
+86 10 6533 4395
Dr. Niraja Srinivasan Director Washington, DC +1 202 466 3510
William P. Hrycay Associate Director New York City +1 212 345 1518
Nihan Mert-Beydilli Associate Director Los Angeles +1 213 346 3035
Amanda Pletz Associate Director London
+44 20 7659 8528
+33 1 70 75 01 85
+41 22 819 94 94
Tom Braukmann Principal Frankfurt +49 69 710 447 511
Dr. Alexander Voegele Affiliated Consultant Frankfurt +49 69 710 447 501
Title Type Author
Managing Transfer Pricing in the COVID-Related Economic Downturn Published Article Dr. Harlow Higinbotham, Dr. Vladimir Starkov, Nihan Mert-Beydilli
Germany: The Changing Model of Group Financing Centres Published Article Yves Hervé, Philip de Homont and Georg Dettmann
NERA Experts Offer Insight into OECD Guidance on Financial Transactions White Paper Amanda Pletz, Ralph Meghames and Dr. Georg Dettmann
NERA Contributes to Bloomberg Tax Winter 2019 Transfer Pricing Forum Published Article Dr. Alexander Voegele and Philip de Homont
What Is the Value of Users, Anyway? How to Value the User Contribution to Digital Ent... Published Article Vladimir Starkov and Oceana Wang
Sustaining Contract R&D Service Solutions in a Post-BEPS DEMPE Context Published Article Dr. Yves Hervé, Philip de Homont
Implicit Support and Its Implications on Guarantee Fee Pricing: Fact or Fiction Published Article Amanda Pletz, Gary Lambert, Dr. Georg Dettmann, and Diana Kabir
NERA Experts Comment on the OECD Proposal for a “Unified Approach” under Pillar One Regulatory Filing Dr. Vladimir Starkov, Dr. Yves Hervé, Amanda Pletz, Dr. Emmanuel Llinares, Dr. Harlow Higinbotham, Pim Fris and Dr. Jacques Potin
How to Adapt to the DEMPE Concept When Using Third-Party Licensing Agreements for Tra... Published Article Dr. Yves Hervé, Philip de Homont
Transfer Pricing Challenges in the Digital Economy: A Case Study of the Internet of T... Published Article Dr. Niraja Srinivasan