The parent company of a multinational group operating in the financial sector granted intercompany loans to its subsidiaries, including the Italian company, in order to provide them with liquidity necessary to provide loans to their customers.

1. Financial Transfer Pricing -loan
Case History n.1
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2. Transfer Pricing Italy Slide 1
Transfer Pricing
Specialists

3. Transfer Pricing Italy Slide 2
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4. The transaction
The parent company of a multinational group operating in the
financial sector granted intercompany loans to its subsidiaries,
including the Italian company, in order to provide them with
liquidity necessary to provide loans to their customers.
Slide 3Transfer Pricing Italy

5. Activities carried out
During the preparation of local transfer pricing documentation an
economic analysis on Transfer Pricing was required to be
performed in order to determine the arm’s length nature of
interests paid by the Italian company due on loan granted.
Slide 4Transfer Pricing Italy

6. In particular, the following analysis
were carried out: method selection
Slide 5
Transfer Pricing Italy
With specific reference to intercompany financial transactions, both the OECD
and the Italian Ministry of Finance consider the methodology of comparable
uncontrolled price as preferable : under this criterion, the arm’s length nature of
funding is determined by comparing the rate of interest under analysis with what
would be charged for comparable transactions between independent Enterprises
(so-called external comparison), or between one of the companies carrying out
the transaction and an independent company (so-called internal comparison).

7. Application of the CUP method
Under this method, as clarified by the Ministry of Finance and the OECD guidelines,
in order to compare two or more financial transactions, are particularly important
among many elements, the following factors:
 The choice of the relevant market, (i.e. if the lender or the borrower market);
 The title, nature and the objective of the transaction;
 The amount, the duration, the currency of the loan as well as the any possible
exchange rate risk and related guarantees.
Considering that it was possible to obtain data on comparable transactions carried
out between third independent parties (external comparison), the “Comparable
Uncontrolled Price Method (CUP)" was considered the most appropriate method
to testify the arm’s length nature of the transfer price applied to the financial
transaction (loan) under review.
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Transfer Pricing Italy

8. Application of the method, three main
phases.
Phase 1 - A verification of the applicability of internal comparison;
Phase 2 - External comparison, analyzing the following aspects:
 The risk free rate of interest;
 The creditworthiness of the Italian company, considering that it
is part of a specific Group;
 Other features of intra-group loan.
Starting from the above-mentioned aspects, through the use of
specific databases, market information have been identified
concerning aggregated corporate loans comparable to those of the
financial transaction under review. In particular, to get to the arm’s
length pricing, comparison market data were used to show the
returns of the market for loans comparable to the transaction under
review in terms of credit rating, in terms of issue date and terms of
loan, always making reference to relevant market.
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Transfer Pricing Italy

9. Phase 3 - Qualitative and quantitative analysis aimed at identifying, through a
gradual process of data screening, a sample of returns on specific rated corporate
bonds through the use of market indices composed by data on bonds classified
under the same credit rating category of that of the company and issued in the
same market.
The analysis was completed with the identification of a market range of
values ​​within which the Group could determine the rate of
interest to be achieved in arm's length intercompany outstanding transactions.
Slide 8
Transfer Pricing Italy

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Slide 9
Transfer Pricing Italy