The Resource Implicit support

Implicit support

Implicit support
Implicit support
General Electric Capital Canada Inc. (Tax Court of Canada, 2009) involved the question of whether a related party guarantee fee should be reduced to the extent that an arm's length lender would assume a level of "implicit" group financial support for the borrower absent the formal guarantee, and so assign to that borrower a level of creditworthiness above that which the borrower's own financial position would imply. More generally, similar thinking might also be applied to related party interest rates (in loans and in cash pooling arrangements) and the quantum of related party debt. Credit rating agencies licence out their implicit support adjustment models (which increase the standalone rating of the borrower), whereas banks are known to assign to borrowers the rating of their parent company notched down in a more broad-brush way according to the perceived likelihood of financial support from the borrower's group. QUESTIONS: Having regard to local legal or regulatory provisions, administrative practices, the result of tax audits and case law, what is the position in your jurisdiction on the following transfer pricing issues: 1. Whether making such a creditworthiness adjustment is regarded as being contrary to the arm's length principle; 2. Whether the practices of credit rating agencies or of banks would be accepted by the tax authority as being a sound basis for making such adjustments; 3. Whether the effect of implicit support should be viewed in the same way as the effect of a formal guarantee, so that its impact on the quantum of debt should be disallowed
Citation source
In: Transfer pricing forum. - Arlington. - Vol. 4 (2013), no. 4 (December) ; 49 p
Geographic coverage
Language note
  • associated enterprises
  • arm's length principle
  • guarantee fee
  • transfer pricing
  • loan
  • debt
  • cash pooling
Implicit support

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