|Yu Tao||Jobst Wilmanns|
The interest rate must be at arm's length. Arm's length is undefined, but should lie somewhere between the borrowing and lending rate typically on offer from banks. Third-party comparisons often assume there to be little or no loan risk, not least in reflection of the free-of-charge "group backing" featuring in the transfer pricing rules. This, though, has prompted an intention of changing towards rating a borrower within a group at the group rating rather than on its own financial standing. Unfortunately, attempts to reach a consensus on a rating formula have all foundered on the unanswered question of a parent's ability to strip a subsidiary of assets, and thus to shift the credit risk, at will. The same problem is also felt by members of international cash pools. Frequently, many still take a broad approach of basing the pool interest rates on EONIA or EURIBOR with a discount or premium of, say 20 or 30 basis points to cover the cost of running the pool. However, tax auditors are ever more searching in their demand to know which entity takes the risk and to impute income or disallow expense accordingly.
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