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Successfully Navigating the Complexity of Intercompany Financing


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Successfully Navigating the Complexity of Intercompany Financing

This article is written and published by S&P Global Market Intelligence, a division independent from S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.

Multinational Enterprises (MNEs) will be familiar with the use of intercompany loans to provide funds for subsidiaries and affiliates, with the pricing of these loans being one of the top international taxation issues that many companies will face. The “arm’s length” principle requires two related companies to set the same transfer price for an intercompany transaction as would have been done by two unrelated entities had they been engaged in the same or similar transaction. The price, therefore, reflects what two companies would have reached if bargaining in a competitive market.

 Alternative Uses for Transfer Pricing Raises Concerns

Transfer pricing can also be incorrectly used as a tax-planning tool, enabling companies to shift liabilities to lower-tax jurisdictions. This has been recognized by authorities around the world that keep a close eye on transactions as a result. Domestic tax base erosion and profit shifting (BEPS) due to MNEs exploiting gaps and mismatches between different countries' tax systems affects all countries, according to the Organization for Economic Co-operation and Development (OECD).[1] The higher reliance on corporate income taxes in developing countries' means they suffer disproportionately from BEPS.

In February 2020, the OECD published the Transfer Pricing Guidance on Financial Transactions (“Guidance”) to clarify the application of the principles of the 2017 Guidance for corporate taxpayers, auditors, and tax authorities. In October 2021, 136 countries and jurisdictions joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.

Getting transfer pricing right has never been more important. This blog introduces a unique approach developed by S&P Global Market Intelligence to help corporate treasurers, audit teams, tax advisory groups, and more meet the arm’s length standard and adhere to the Guidance.

Assigning Appropriate Intercompany Interest Rates

As global regulations and guidelines continue to grow, at S&P Global Market Intelligence we understand the importance of having access to the right data and tools to manage the pricing of cross-border transactions. Given this, we have recently launched Credit Risk Pricing, a streamlined tool to help fast-track the pricing of credit transactions. A four-step approach lets users easily assess a company's creditworthiness, create a stand-alone credit score,[2] and find comparable yields and a defensible interest rate − all in line with the Guidance. The steps are as follows:

Step 1: Input or extract financial data for the subsidiary or affiliate

The analysis starts by leveraging our comprehensive database of company financials to automatically create company credit scores in our credit scoring interface. Alternatively, users can manually input their own proprietary financials or use S&P ProSpreadTM, which automatically extracts and inputs data from images and PDFs using Natural Language Processing. 

his section of the interface also provides risk factors by country and industry, to capture any country-industry combination being analyzed. These inputs can be adjusted if users have an alternative perspective.

Step 2: Apply optional adjustments -- Qualitative and Overlays

Four areas are considered here that can positively or negatively impact the credit score that will be created:

Qualitative Factors: The Guidance suggests adding qualitative information, where available. For example, this could include how diversified a subsidiary is by country/product line/customer base, the quality of its management, and its payment behavior.

Parental & Government Support (PGS):The Guidance acknowledges that PGS can affect the creditworthiness of the borrower and impact the credit score. This feature will factor in the financial health of the parent company and, if known, users can indicate whether the support expectation is positive, negative, or neutral for parental support.

Loss Given Default (LGD): The Guidance states that when both an issuer and issue rating[3] are available, the issue rating is more appropriate to price the transaction.

Macroeconomic Factors: The solution provides current data on a wide range of economic factors, such as interest rates, unemployment rates, and GDP. A stress-testing capability offers the opportunity to look at a range of situations to see, for example, how a positive or negative environment could impact the credit risk of the subsidiary or affiliate.

Step 3: Output the Credit Risk Score with any optional adjustments

Once the financials and optional adjustments have been entered, users simply click to generate a probability of default in percentage terms and the associated letter grade credit score, which are generated using our Credit Analytics models. In addition, if information mentioned in Step 2 is entered, users will receive an LGD-adjusted credit score along with macroeconomic impacted values for the subsidiary or affiliate.

Step 4: Output the final interest rate and constructed yield curves

The final credit score is utilized to determine the Comparable Uncontrolled Price (CUP) and our final interest rate using yield curves, which is considered to be the most appropriate approach in the context of intercompany loans, in part due to the large amount of public data available on such transactions. S&P Capital IQ Corporate Bond Yield Curves are automatically used in this benchmarking exercise. They offer broad and consistent coverage of credit term structures (1 month – 30 years), across some major currencies, every GICS. [4]

A Useful Summary of Findings

As shown in Figure 1 below, the final outputs are summarized on the Credit Risk Pricing results page. This includes:

      • The interest rate and final credit risk score.
      • The all-in yield curve and Z-spread curves and tables.
      • A list of unique security issuers.
      • The pricing rationale, with editable text.

The page can be exported as a PDF or a Word document to include in a company’s transfer pricing documentation.

Figure 1: Credit Risk Pricing Page

Graphical user interface

Description automatically generated with low confidence


This step-by-step approach that combines a robust set of data and analytical models in an easy-to-use interface is reducing the complexity of transfer pricing. This is all done while meeting the arm’s length standard and adhering to the Guidance.    

[1] “International collaboration to end tax avoidance”, OECD, from website on October 19, 2021,

[2] S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.  

[3] A credit rating is the same as a credit score in this context.

[4] GICS=Global Industry Classification Standard.

For more information on the Credit Risk Pricing tool
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