Defending the policy of intra-group financing and the development of a complex financial product

Expertise : Litigation

Business challenge

• In a tax audit of a large American industrial group, the tax authority called into question the intra-group financing policy of the group.
• The policy of intra-group financing integrated risk hedging tools, allowing subsidiaries to be financed with a fixed rate through a specific subsidiary of the group. The valuation of these tools were considered excessive by the tax authority.

Approach

• The subsidiaries’ ability to be financed at a fixed rate was evaluated by considering that it was implicitly the sale of a financial product that gives the right to exchange fixed rates against variable rates (Bermudan Swaption).
• The swaption was then evaluated by using appropriate methods and with estimates of characteristic parameters, including the rate volatility.

Benefits and results

The tax authority accepted the approach and the actual value of the swaption, and no tax adjustment was required.