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Financial transfer pricing

May 01, 2013  |   Blog,Financial   |     |   1 Comment

The transaction

The parent company of a multinational group operating in the financial sector granted intercompany loans to its subsidiaries, including the Italian company, in order to provide them with liquidity necessary to provide loans to their end customers.

Contract 1

Activities carried out

Within  the preparation of the local transfer pricing documentation it was required to perform  an economic analysis on Transfer Pricing for the determination of  the fair market value of intercompany loans lent in particular to the Italian company.

Details of the project

In particular, the following analysis were carried out:

Method selection

With specific reference to intercompany financial transactions, both the OECD report (1) and the Italian Ministry of Finance (2) have considered  preferentially adoptable  the method of comparable uncontrolled price: under this method, the arm’s length nature of funding is determined by comparing the interest rate under analysis with what would be charged for comparable transactions between independent enterprises (the so-called external comparison), or between one of the companies carrying out the transaction and an independent company (the so-called internal comparison).

Application of the method

Under this method, as clarified by the Ministry of Finance and the OECD guidelines, in order to compare two or more financial transactions, among many elements to be considered, the following factors are worth to be highlighted:

  • The choice of the relevant market, i.e. the market in which the transactions comparable to those tested must be sought (i.e. whether it should be that of the lender or that of the borrower).
  • The title, nature and the objective of the transaction;
  • The amount, the duration, the currency of the loan as well as the any possible exchange rate risk and related guarantees.

According to the above and considering that it was possible to obtain data on comparable transactions carried out between third independent parties (external comparison), the “Comparable Uncontrolled Price Method (CUP)” was considered the most appropriate method to testify the arm’s length nature of the transfer price applied to the financial transaction (loan) under review.

Following a consolidated methodology, the application of the method was developed in three main phases:

  • Phase 1 – A verification of the applicability of internal comparison;
  • Phase 2 – External comparison: in order to verify the arm ‘s length nature of the interest rate applied to the loan, the following aspects were analyzed:
    • the risk free rate of interest;
    •  the creditworthiness of the Italian company, taking into consideration that it is part of a specific Group;
    •  Other intra-group loan features.

Starting from the above-mentioned aspects, through the use of specific databases, market  information have been  identified concerning corporate loans comparable to those of the financial transaction under review. In  particular, to get to the price comparison,  market data were used to show the returns of the market for loans comparable to the transaction under review in terms of credit rating, in terms of  issue date and terms of loan,  always making reference to the relevant market.

  • Phase 3 – Qualitative and quantitative analysis aimed at identifying, through a gradual data skimming  process, a sample of returns on specific rated corporate bonds through the  use of market indices composed by data on bonds  classified under the same credit rating  category of the company’s one and issued in the same market.

The analysis was completed with the identification of a market range of  values ​​within which the Group could determine the arm’s  length rate of interest to be achieved in the above intercompany transactions.


(1) see “Transfer pricing and multinational enterprises”, 1979  and “Transfer pricing guidelines for multinational enterprises and tax administrations”, 1995,  update 2010.

(2) see  in particular, Circular letter dated  September 22, 1980, n.32/9/2267 and Circular letter dated 12 1981 n.42/12/1587.

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[1] Cfr. “Transfer pricing and multinational enterprises”, 1979 e “Transfer pricing guidelines for multinational enterprises and tax administrations”, 1995.

[2] Cfr., in particolare, Circolare del 22 settembre 1980, n.32/9/2267 e Circolare del 12 dicembre 1981 n.42/12/1587.

1 Comment for this entry


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