Transfer pricing: loan guarantee fees

Guarantee fees form an integral part of many multinationals' intragroup financing structures. As multinationals seek to structure their debt efficiently in an era of reduced credit market liquidity the uncertainty of how guarantee fees will be treated from a transfer pricing perspective increases the risk of adjustments for mis-pricing and even the recharacterisation of the transactions. Revenue authorities around the world may adjust taxable profits if guarantee fees are not charged or deny deductions when they are charged. With liquidity in the debt markets still limited the value of guarantee fees is potentially much greater than in the past.

What are guarantee fees?

When a lender makes a loan to an unrelated borrower the amount of interest charged on that loan has to compensate the lender for two principle factors the time value of money and the assumption of credit risk....