Transfer pricing – Intra-group guarantees

The transaction

The parent company of an European group operating in the financial sector, upon payment of a fee, agrees to reimburse the Italian subsidiary in case of bad debts from end-customers to whom the Italian company has granted credit.

Activities carried out

During the preparation of the local country transfer pricing documentation, an economic analysis on Transfer Pricing was required aimed at determining the arm’s length market value of the remuneration paid for granting the guarantee to the Italian subsidiary.

Details of the project

In particular, in order to verify whether the rate of remuneration paid by the Italian company against the issuance of the Guarantee is at arm’s length, the following aspects were considered:

• the creditworthiness of the Italian company in a given period of time;
• other features of intra-group Guarantee.

Starting from the above-mentioned aspects, a specific database has been used to identify market price quotations on transactions comparable to the financial transaction under analysis. In particular, in order to compare the price, data were used to show the market yields for comparable categories of guarantees substantially comparables to the transaction under analysis in terms of credit rating, issue date and guarantee terms.

For this purpose, based on existing factors characterizing the transaction under review, the analysis focused on the identification of credit default swaps (“CDS”) which, being essentially comparable to the guarantees under analysis and being listed on an OTC market, allow to find reliable data on market rate of return applied to the granting of guarantees on securities and bonds issued by companies comparable to that under review.

The analysis was then completed with the identification of a range of market values ​​within which the Group may determine the arm’s length remuneration to be set in the intercompany guarantee fees.

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