Member question: âWe are in the process of reevaluating our intercompany (IC) loan rate-setting policy. Iâm trying to benchmark to understand how this is managed at other companies. What is your companyâs approach to setting rates on any intercompany lending agreements?
- âI know reference rates are in flux with the Libor transition but I am specifically trying to understand, from a transfer pricing standpoint, if you set rates with a standard mark-up or based on the entityâs creditworthiness similar to a bank.â
Peer answer: âFor long-term IC loans, our internal funding team works with tax to determine an appropriate armâs-length spread over benchmark.
- âThat process has varied over the years, but typically involves either getting some local bank indicative loan rates for comparison or doing other local market research on comparable companiesâ public debt issuance and/or credit indicators.
- âThis would all be documented and retained as supporting evidence of the arms-length rate.
âFor revolving (short-term) IC loans, we may use comfort letters and/or parent guarantees to backstop the subsidiary IC debt.
- âThis has allowed us (in most cases) to have a fixed credit spread for our short-term IC loan portfolio. Obviously, that type of approach would need to be well established with tax.
âWith the upcoming Libor replacement, there is an expectation that the credit component backed into Libor will need to be reflected in the updated rates plus the spread we use.
- âThese details are still being worked out by our Libor replacement team.â
Using SOFR for IC. The Alternative Reference Rates Committee (ARRC) recently released  recommendations for IC loans based on the Secured Overnight Financing Rate (SOFR). ARRCâs announcement does not specifically address transfer pricing. 
