BLOG — Aug 25, 2026
Guarantee Fees Simplified: From OECD Principles to Practical Solutions
Intra-group guarantees remain a common feature of multinational financing structures, especially where subsidiaries rely on parent support to access external funding or improve borrowing terms. When a guarantee is provided, tax and finance teams face the same core question: should a guarantee fee be charged, and if so, what is an arm’s length amount— i.e., what an independent guarantor would charge for the credit protection provided?
The question above is focused on whether and how the explicit guarantee fee should be treated for transfer pricing purposes. It should be kept separate from related financing tax questions, such as whether the borrower’s debt level is commercially supportable, whether interest is deductible, or whether a compensating payment may be relevant following a separate financing adjustment.
Under the OECD (Organisation for Economic Co-operation and Development) transfer pricing framework, a key consideration is identifying the incremental economic effect of the guarantee. An explicit, legally enforceable guarantee can be a chargeable intra-group service. However, the general comfort a lender takes from a borrower being part of a stronger group (“passive association”) is typically reflected in the subsidiary’s borrowing terms and is not usually the subject of a stand-alone fee. The guarantee fee analysis should therefore focus on the incremental effect of the legally binding guarantee, taking into account the net impact of group membership — whether this provides an advantage, such as implicit support, or a disadvantage, such as contagion risk from a weaker or financially stressed group. Where a measurable benefit can reasonably be attributed to the explicit guarantee, such as a reduced interest rate or improved loan terms, should then form the basis for determining the arm’s length fee range. Accordingly, the pricing analysis should isolate the uplift arising from the explicit guarantee itself, excluding any value already reflected through implicit support.
To support consistent analysis, S&P Global Market Intelligence has developed a framework that incorporates two commonly used OECD-aligned approaches—the yield approach and the cost approach. The framework can be used to estimate indicative fee ranges based on credit risk assessments and selected market-based assumptions (e.g. credit risk, tenor)
Support and Guarantees in Inter-Company Financing: Key Principles and Common Confusions
OECD guidance generally distinguishes implicit support from an explicit guarantee:
Implicit support (passive association) refers to the effects that can arise from a subsidiary’s affiliation with a larger conglomerate. Depending on the conglomerate’s overall profile, this association may improve (or lower) the subsidiary’s perceived creditworthiness or operating stability even without any explicit legal commitment from the parent. Because it is not an active, separately rendered service, it should not be priced as a separate intra-group service.
Explicit support is a formal, legally binding commitment, such as a guarantee, where the guarantor promises to cover the issuer’s obligations if it defaults. If an explicit guarantee delivers a measurable benefit beyond implicit support (like a lower interest rate or improved access to debt), then a fee may be justified on the basis that the guarantor assumes incremental risk and that the arrangement would, in comparable circumstances, be entered into by independent third parties.
An important practical consideration is that even an explicit guarantee may have limited incremental value if the borrower already benefits from strong implicit support such that its stand-alone credit profile is already close to the group-supported level. In those cases, an arm’s length fee may be low or even nil.
This conclusion is specific to pricing the explicit guarantee. The same guarantee or group support may still be relevant in other analyses, such as thin capitalisation, borrowing capacity, interest deductibility, or compensating adjustment considerations, but those analyses answer different questions and should not determine the guarantee fee itself. For instance, in thin capitalisation analyses, a guarantee may be relevant because it can influence the commercial supportability of the debt or the terms a third-party lender would offer, which are critical factors when determining whether a borrower’s debt level is arm’s length.
Before pricing: Determine What the Guarantee Changes
OECD guidance emphasises that pricing should follow the delineation of the transaction. For guarantee fees, this means focusing on what the explicit guarantee changes for pricing purposes, rather than using the guarantee analysis to resolve separate questions about debt capacity, deductibility, or compensating relief. In practice, three checks typically influence the outcome.
Economic benefit to the borrower: Does the guarantee reduce the interest rate, increase the amount available, extend maturity, or improve covenants? If there is no incremental benefit, there is limited basis for a material fee.
Effect of group membership: The baseline should reflect implicit support. The fee should relate only to the incremental uplift attributable to the explicit guarantee, not the entire difference between a stand-alone borrower and a guaranteed borrower.
Guarantor capacity and correlation: A guarantee is only valuable if the guarantor can perform under stress. Where guarantor and borrower share the same risk drivers (for example, same sector and geography), the guarantee may be less valuable than it appears in normal conditions.
The following illustration provides a simplified example of how a subsidiary, parent guarantor, and creditor may interact within a guarantee structure. The guarantee fee is paid to the parent for credit support, while the loan interest is paid to the creditor for financing. Keeping these pricing mechanisms distinct is essential for supporting accurate transfer pricing and compliance with OECD guidance.
Two methods commonly used in practice: the yield (maximum) and cost (minimum) approaches
Guarantee fees are often assessed using two complementary approaches:
- Yield approach (maximum guarantee fee): measures the borrower’s benefit from the guarantee in terms of lower borrowing costs. Conceptually, it compares the borrowing rate without the explicit guarantee (but including implicit support) to the borrowing rate with the explicit guarantee in place. The yield difference represents the benefit pool attributable to the guarantee and sets a maximum fee the borrower would be willing to pay. If the borrower is not economically better off after considering the guarantee fee, the rationale for the arrangement may warrant additional analysis under the arm's length principle.
- Cost approach (minimum guarantee fee): estimates the guarantor’s expected cost of assuming the contingent risk. In its simplest form, the minimum fee is anchored to expected credit losses (ECL), derived from probability of default (PD) over the relevant tenor and loss given default (LGD). This serves as a minimum for the arm’s length fee: in principle, the guarantor would not be expected to accept a remuneration below its expected credit loss, potentially uplifted for a return on capital at risk and other relevant costs, aligned with the outcome independent parties would negotiate.
Addressing Key Challenges in Guarantee Fee Estimation
Guarantee fees can become difficult to estimate for specific, observable reasons. One common challenge is that implicit support may be disregarded or insufficiently accounted for[5]. The yield approach requires a clearly defined baseline of “without the explicit guarantee but with implicit support” ; if that baseline is not applied consistently, the resulting benefit (and therefore the fee ceiling) can be overstated.
Another challenge is the limited availability of comparable guarantee fee data. Third-party guarantee information is often scarce and may not be directly comparable in terms of structure, tenor, security, or other commercial terms.
Issue-specific risk also matters. Two borrowers with the same issuer credit risk can have different loss severity outcomes (i.e. LGD expectations) depending on the characteristics of the specific exposure, including structure, security, and seniority.
Our framework is designed to support these challenges by applying a consistent, documented analytical process that makes both the yield and cost analysis repeatable and transparent--linking credit risk assessments to market-relevant benchmarks, translating them into consistent fee floors and ceilings.
- Yield approach: supports borrower/guarantor credit risk assessments (using publicly available S&P Global Ratings ratings, where applicable, or Credit Analytics shadow rating credit scores), mapping those credit scores to GSAC (Government, Supranational, Agency and Corporate) Sector curves [6] using currency, sector, tenor, and country settings as key drivers. Users can apply a consistent curve statistic (e.g. median or mean) and then calculate the maximum guarantee fee by comparing the relevant yields. Where issue-level risk (rather than issuer-only risk) is required, the framework also supports LGD-adjusted credit scores from Credit Risk Pricing (CRP).[7]
- Cost approach: generates PD (%) inputs from Credit Analytics models and estimates LGD using LossStats®[8], based on the characteristics of the beneficiary’s loan (issue risk). It then calculates expected credit losses (ECL) and expresses the result as an indicative minimum fee, with an optional user-defined floor rate applied.
The diagram presents the final output of the guarantee fee framework, displaying the arm's length range for the guarantee fee, bounded by the minimum fee (Cost approach) - a practical lower bound reflecting the guarantor's expected cost of risk - and the maximum fee (Yield approach)- which sets the upper bound based on the yield/benefit implied by the guarantee. An additional floor-rate constraint is applied optionally so that the minimum fee cannot fall below the specified floor.
References
- OECD, Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8-10, including guidance on accurate delineation, financial guarantees, implicit support/passive association and guarantee pricing methods.
- HMRC, International Manual INTM413130 — Evaluating guarantees establishing the arm’s length value of a guarantee, available at: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm413130
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[1] OECD, Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8–10, Chapter X (Financial Transactions) — financial guarantees: identifying and pricing the economic benefit of an explicit guarantee vs passive association/implicit group effect.
[2] OECD, Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8–10, Chapter X (Financial Transactions) — accurate delineation and the distinction between economically relevant guarantee support and benefits arising from passive association.
[3] OECD, Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8–10, Chapter X - accurate delineation before pricing; pricing financial guarantees based on economically relevant characteristics.
[4] OECD, Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8–10, Chapter X - pricing methods for financial guarantees including yield-based and cost-based approaches.
[5] OECD, Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8–10, Chapter X - emphasis on baselines/accurate delineation (including separating implicit support from explicit guarantee benefits) when applying pricing approaches.
[6] GSAC (bond curve) is the government/supranational/agency/corporate “sector curve” reference data used in Credit Analytics credit risk pricing, providing the bond curve term structure input for arm’s-length pricing when producing credit-related yield/price outputs.
[7] CRP (Credit Risk Pricing) is the pricing approach in S&P Global Credit Analytics that derives a bond’s credit-related pricing output by using credit risk models (e.g., CreditModel™ / PD Model Fundamentals) together with relevant yield/curve inputs—so the resulting price/yield reflects the issuer’s credit risk.
[8] LossStat® (LossStats Model) is a loss and recovery analytics model in S&P Global Credit Analytics that estimates default loss and recovery in an alternative way to standard assumptions, supporting loss-rate / loss-outcome estimation and credit performance analysis.
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