A financial guarantee is a guarantee provided by one entity on behalf of another entity against a third party-liability. This usually involves a parent entity providing a guarantee to the bank on behalf of a subsidiary entity. In general, a financial guarantee provides for the guarantor to meet specified financial obligations in the event of a failure to do so by the guaranteed party, thus reducing the bank’s risk. The subsidiary can therefore negotiate a lower interest rate if the risk profile of the guarantor is lower than that of the subsidiary itself. The entity receiving the guarantee will most likely have to pay a guarantee fee to the guarantor.
At Quantera Global, we can determine whether a guarantee fee is due, and also determine this fee. The fee is determined by performing OECD-compliant analyses. We determine financial guarantee fees using the following methods: CUP method, Yield approach, Cost approach, Valuation of expected loss method and Capital support method.
Services of Quantera Global in brief
Design and analysis of the financial guarantee, including determination of:
- the economic benefit derived from the guarantee
- the effect of group membership
- the risk exposure of the guarantor
- the financial capacity of the guarantor
- the guarantee fee
- the at arm’s length guarantee fee
Quantera Global can assist you with any of the services listed above including preparing the relevant transfer pricing documentation. Our advisors are available to support you. If you would like to discuss how we can be of service to you, please make an appointment for a free consultation by phone or fill in our contact form. We are looking forward to meeting you.