Article: Transfer Pricing of Financial Guarantees: The Limits of Arm’s Length and a Practical Solution

Abstract

This article explains that current practical approaches to the pricing of intra-group financial guarantees attribute economic significance to group affiliation that diverges from common approaches and depends on a refined independence hypothesis that is not universally applied and risks suggesting uncertainties about the wider application of the arm’s length principle. Guidance has not assimilated recent revisions to the OECD guidance on control of risk, advocates complex and unsatisfactory valuation methods, and unconvincingly refers to implicit support that unhelpfully disguises active functions. With the benefit of revised guidance, circumstances similar to those in the General Electric case could be resolved differently. Intra-group financial guarantees epitomize the challenges faced when dealing under the arm’s length principle with how associated enterprises are capitalized. It is inappropriate to subject the arm’s length principle to the contortions and divergence described in this article when the guarantee derives from deliberate choices of the guarantor about how the subsidiary is capitalized. Treating creditworthiness within a multinational group as indivisible and collective is a practical solution, either on principled grounds or as a safe harbour, thereby eliminating the need to consider intra-group guarantee fees for transfer pricing purposes. Financial guarantees, transfer pricing, arm’s length principle, creditworthiness, implicit support

The Effect of Fund Transfer Pricing on Brazilian Bank Branch Performance

“…The OECD guidelines recommend the use of various methods to determine transfer prices, including comparable uncontrolled price (CUP), the resale price method (RPM), the cost plus method (CPM), the transactional net margin method (TNMM), and the profit split method (PSM). These methods involve comparing intercompany transaction prices, costs, and profit margins with similar transactions between independent parties (Hickman & Moura, 2023;Wardhana, 2019, OECD, 2010.…”