Dealing with implicit support in relation to intra-group debt

In one case Charles River Associates has dealt with, the tax authority asserted that a subsidiary is of such strategic importance to the group’s ultimate parent company that the subsidiary’s “stand-alone” credit rating should be adjusted upwards to the parent’s rating due to implicit support. This is despite the fact that an explicit guarantee had not been provided by the parent and despite the traditional transfer pricing assumption that estimating a stand-alone credit rating was appropriate under the arm’s length principle. The tax authority’s aim was to reduce the interest rate on the subsidiary’s intra-group debt and the interest deduction it had claimed.