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Transfer Pricing – How Much Does Your Debt Cost?

Published on 18 Nov 2008 | Took place at Swissotel, Sydney, NSW

This event was aimed at CFOs, financial controllers and tax managers of companies with intra-group financing arrangements or loan guarantees.

With the global credit crunch and liquidity crisis, the cost of debt funding for multinationals is rising rapidly. Did you know that since mid-2007, risk margins, (i.e. credit spreads) for debt funding have more than doubled?

In the current environment of variable international interest rates, increased uncertainty and reduced liquidity, many multinationals are looking to fund from within. A recent survey of companies in the Asia-Pacific region showed that over 45% of companies are reacting to the crisis by relying more on internal funding sources or requiring parental guarantees to raise debt. The ability of an entity to provide liquidity is rapidly becoming a key function within multinationals.

As a result of these changes in market conditions, it is important to ensure that inbound and outbound debt is priced appropriately. Furthermore, recent scrutiny by the ATO on financing also means you need to be able to defend interest rates on intra-group debt arrangements. According to the ATO, even if gearing is within the thin capitalisation ‘safe harbour’, you may need to demonstrate that the interest rate charged is arm’s length with regard to how much the company may have been able to borrow in the market.

The time is right to re-examine the pricing of your intra-group funding arrangements.

Individual sessions

Transfer pricing – How much does your debt cost?

Author(s):  Geoff GILL,  David GRECIAN

This paper:

  • outlines the transfer pricing impacts of the global credit crunch
  • discusses how to determine arm's length interest rates and take account of key factors such as borrower credit worthiness and characteristics of the loan
  • discusses the practical impact of the ATO's recent publications on the issue of debt finance, and the major areas of controversy
  • provides practical guidance on how to deal with the thorny issue of how to price loan guarantees.
Materials from this session: