Guaranteeing the performance of a related party -- an arm's length view

Global Transfer Pricing

Due to globalization and the size of MNCs, performance guarantee arrangements, within a MNC group, are common and growing.

Performance guarantee is relatively a new area of transfer pricing concern for taxpayers as there is not much guidance available from the OECD or tax authorities. Performance guarantee arrangements enter the transfer pricing realm when a related party (usually the parent) supports the commercial contracts of another member of the group by issuing a corporate guarantee (or a bank's standby letter of credit  drawn on the parent's credit facilities) to a counterparty.

A considerable amount of discussion is being generated regarding the implications of performance guarantee for transfer pricing purposes. The attention garnered by performance guarantee fees is likely to increase in the next few years. It would be easier to defend performance guarantee arrangements before tax authorities if you have identified the performance guarantees, determined the arm's length pricing (i.e., quantum of the guarantee fee) and have an appropriate level of documentation.

The recording will address the following:

  • Overview of performance guarantees;
  • Roles of the parties to the performance guarantee arrangement;
  • Whether performance guarantee fee should always be charged between related parties; and
  • Methodologies to price performance guarantees

At the end of this presentation, you will:

  • Recognize the nature of performance guarantees;
  • Understand when not to have a performance guarantee fee between related parties; and
  • Know how to price a performance guarantee arrangement.

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