As noted recently by members of an American Bar Association committee, the pricing of related-party guarantee fees is an area of “tremendous uncertainty.” The adoption of the U.S. services regulations several years ago, coupled with recent high-profile court cases, have increased the urgency for new guidance, the ABA committee members said in a recent white paper (visit http://www.americanbar.org/content/dam/aba/administrative/taxation/091312comments.authcheckdam.pdf).

In the absence of specific rules, taxpayers are looking to:

1. Organization for Economic Cooperation and Development guidelines at paragraph 7.13, which addresses guarantees in the context of a service—something that generally would justify compensation under the 1995 guidelines. The paragraph states in part that “an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of affiliation alone has a credit rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefited from the group's reputation deriving from global marketing and public relation campaigns.”
2. Case law—particularly the GE Capital Canada case (http://decisions.fca-caf.gc.ca/en/2010/2010fca344/2010fca344.html), in which Canada’s Federal Court of Appeal rejected the Canada Revenue Agency's argument that an arm's-length party would not have paid a guarantee fee to the company’s U.S. parent, but also found that the value of the implicit support provided by the U.S. parent to GE Capital Canada through passive association should be taken into account in determining the benefit.
3. Examples in the U.S. regulations on intercompany services. Example 18 of Regs. §1.482-9(l)(5) describes the case of a comfort letter from a parent to a subsidiary. The acquired company in the example, Y, obtained a contract from a financial institution for a project that was significantly larger and more complex than any other project it has undertaken before. A letter from the parent company, X, to the financial institution stating that it would maintain its percentage ownership interest in the subsidiary until the contract was completed allowed the subsidiary to obtain the contract on more favorable terms than otherwise would have been possible.

The Bloomberg BNA and Baker & McKenzie Global Transfer Pricing Conference in Paris will tackle these issues in a session on March 12 entitled “Pricing Financial Transactions: The Challenges of Transfer Pricing for Loans, Guarantees, and Other Financial Transactions.” To register, visit http://www.bna.com/global-transfer-conference/.

Molly Moses

Managing Editor, Transfer Pricing Report