The Inland Revenue Authority of Singapore (IRAS) released the sixth edition of its e-tax transfer pricing guidance on August 10. This
guidance extended its coverage of intercompany financing, providing a few interesting examples, which this discussion illustrates with
market data.
Paragraph 15.46 discusses intercompany loan guarantees in light of implicit support. The example states:
The parent company of a group with subsidiaries, which alone has an AA credit rating, guarantees a loan to one of its investee companies.
Rating Company A rated Company X at BBB; company X is currently regarded as vulnerable to a further downgrade. Company X is unwilling to
provide third-party security, so the parent company guarantees the loan instead.
Rating Company A is informed of the guarantee. Rating Company A incorporates the guarantee into its rating process, resulting in a rating
of parent company A’s AA credit rating. Company X agrees to accept the loan at the parent company’s AA credit rating and pays back the
full amount of its loan.
Consider a Singapore subsidiary of a US parent corporation. The Singapore subsidiary borrows 100 million Singapore dollars on February 14,
2018, for 10 years with a fixed interest rate of 3 percent.
The Monetary Authority of Singapore notes that the 10-year government bond rate on that date equals 2.25 percent. The 0.75 percent
difference represents the credit spread for AA corporate debt.
A standalone borrower with a credit rating would have likely paid an interest rate of 3.75 percent since credit spreads for borrowers with a
BBB credit rating would be near 1.5 percent. The US IRS might view the appropriate credit spread in this case to be 0.75 percent.
