Transfer Pricing, what is the at arm’s length “fair” price?

Transfer Pricing (TP) raises the question of the at arm’s length “fair” price that the Inland Revenue will accept for the intercompany financing. It is an interesting question that jurisprudence will start answering to. In a recent Court case, the French “Conseil d’Etat” has decided (see the SIBLU case) that we need to consider the own situation of the borrower and not its belonging to a group. The French Court of Paris also confirmed that a comparative study based on an average of bonds interest rates or / and based comparative pricing of peers were not acceptable and enough to justify the spread applied to an intercompany financing. The Court rejected the evidences because they were based on capital market similar transactions and not founded on comparable pricing provided by independent financial institutions in analog conditions.

This interpretation is scaring when we think that banks will not issue firm term sheets and offers for their customers, if at the end of the day it is only used as comparable and as tax evidences, and never drawn down. Eventually, if the funding is granted by the parent- company and not by the bank which quoted the transaction, the financial institutions would be upset. If you quote a deal it is because you are convinced you can sign it.

We should not expect that banks will behave as sort of “free comparative tools” for determining spreads. Jurisprudence should have to adapt to the market reality. They should accept benchmarking solutions, like the ones proposed by credit rating agencies. It must encourage treasurers to remain relatively conservative and cautious in spread fixing. They should not exaggerate in fixing intercompany margins to prevent any contesting by the tax controllers.

Nothing is easy and simple with TP transactions. The « fair transfer price » remains complicate to determine and to evidence. You should remain prepared and on your guards. I imagine we should continue to follow the European jurisprudences to better understand how to evidence transfer pricing in intercompany funding.