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Country ceiling principle offers TP alternative for developing countries

The lack of comparables remains one of the biggest challenges for transfer pricing (TP) professionals, especially in low capacity countries. Gela Barshovi explains how the country ceiling principle may help companies and tax administrations to determine risks, benchmarks and establish comparables.

The challenge of finding accurate comparables is tough in most jurisdictions, but it is most critical for developing countries, especially with regard to financial transactions because of the high importance of country risk involved that makes it burdensome to use foreign comparables that usually serve as the best option for them in other cases. However, application of the country ceiling principle might be ’the way out’ in such situations.

What does the country ceiling principle stand for?

The country ceiling is an assumption based on which a single company not having a higher credit worthiness than the credit rating of its resident country. For example, if a company has an A rating, while the country that this enterprise operates in only has a B rating, the company’s rating has to be (manually) adjusted and reduced to B.

The logic behind this principle is that the country’s rating reflects some macro-economic factors influencing every single company in that jurisdiction – factors that can be commonly missed out when calculating the rating of single taxpayers.

Why the country ceiling principle can serve as a useful toolkit?

When conducting a TP audit on financial transactions, important comparable factors must be determined. A non-exhaustive list of the most important comparable factors is as follows: credit rating of the borrower, the sector in which the borrower operates, the date of issue, the maturity of the loan, currency, the level of risk in the borrower’s country, if the loan has a fixed interest rate, if it’s collateral, and if it’s subordinated. All these factors are crucial for establishing a quality benchmark of independent comparable transactions.

The problem for developing countries is that most of the information on publicly available financial transactions comes from highly developed countries, such as the US and the UK, and, in many cases only bonds are available as comparables because there is usually a lack of information on loans with a fixed interest rate.

Take, for example, a loan received by a company registered in Georgia and compare it with the bond issued by a US or a UK entity. The level of country risk has to be fine-tuned, but it is almost impossible to do this in a completely reliable way. If the aim is just to make such an adjustment, this could lead to the wrong results.

Another option is to disregard the difference between the ratings and making the comparison without an adjustment. However, this is also improper when a country’s risk level serves as a limitation factor. In other words, when the country’s rating is lower than the company’s rating, then it should not be disregarded.

For example, a US company with an A+ rating has more creditworthiness than a Georgian company with the same rating because the latter operates in a more risky jurisdiction (with credit rating BB), and disregarding that difference would also lead to incorrect conclusions.

The suggested solution is to apply the country ceiling principle and eliminate the country risk as an important comparable factor. By reducing a company’s individual rating to the country’s level. Country risk can be eliminated as a crucial comparable factor.

In other words, if an investor is involved in the decision-making process of issuing a loan for a company they will not look at the country’s rating as an important factor to consider because the company’s individual rating is a much more critical factor and that factor absorbs whatever risks there may be in that jurisdiction.

This assumes that the investor will pay attention to the lowest rating (highest risk). If a tax inspector from a developing country makes an adjustment, going by the country ceiling principle, they will be able to look at the loans and bonds issued worldwide.

When the company’s loans and bonds have the same or lower rating as the country in question, it would be more reliable to use financial transactions from advanced countries as the comparables. The ratings of all countries are available online.


As we all know, transfer pricing is an art rather than a science and this approach also does not provide fully reliable results.

However, considering other options, that seems more optimal for low-capacity countries, especially when using databases like Bloomberg or One Source. Thus, the approach could serve as a type of toolkit for developing countries.

This article was written for TP Week by Gela Barshovi, former chief auditor and group leader of transfer pricing at the Georgia Revenue Service. Barshovi has now joined global IT provider Comparex in Germany as a senior associate of transfer pricing in its tax group.

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