Intragroup Financing [in (Malaysian) IRBM Transfer Pricing Guideline 2012]

23.1 Financial assistance between associated persons

-       Intragroup financing is another form of service between associated persons, which falls under subsection 140A(2)

-       Reasonable interest rate should be provided for associate person

23.2 Substitution and Imputation of Arm’s length Interest

- Interest rate should be revise while market interest rate appear significant change

Example 26 - Substitution of non arm’s length interest

Company A has obtained a fixed-rate 10%, medium term loan from an associated person which embeds an option to repay the loan prematurely without penalty. In the third year the market interest rate began to decline to 5%, a rate lower than the fixed-rate agreed upon with the associated person. In an arm‟s length situation, Company A would execute its option to repay the loan as it would not make sense to continue paying the high interest rate of 10%. However, Company A did not exercise the option and continued to pay at the higher interest rate.

In this case, the IRBM may substitute the financial assistance arrangement with an interest rate that reflects the current market situation as if Company A had exercised the option at an appropriate time and entered into similar arrangement at a lower rate. 

23.3 Determination of Arm’s Length Interest

- comparable uncontrolled price (CUP) method is considered to provide the most reliable measure

23.4 Comparability Factors

1. the nature and purpose of the financial assistance;
2. the amount, duration and terms of the financial assistance;
3. the type of interest rate (eg: fixed or floating interest rate);
4. embedded options;
5. guarantees involved in the financial assistance;
6. collateral for the financial assistance;
7. creditworthiness of the borrower;

h.    location of the lender and borrower