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Methodology for Determining Loan Fees for International Loan Guarantees

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The determination of fees for cross-border related-party services is becoming increasingly important as multinational services expand. On July 31, 2009 the U.S. Treasury released final regulations to replace proposed regulations on transfer pricing. However, Internal Revenue Code (IRC) 482 and the associated Treasury Regulations do not give specific transfer pricing guidance for certain financial transactions. Indeed, the proposed regulations which provide guidance for financial services, state that 'lending activities are not included within the definition of global dealing operations.' In addition, the temporary regulations exclude financial transactions 'including loan guarantees' from using the statutorily specified pricing methods for services. We draw from the financial literature to provide an estimation approach for such loan guarantee fees. The method essentially adjusts the international risk-free rate to the hypothetical market rate without the loan guarantee based on the borrowing affiliate's financial risk. [PUBLICATION ABSTRACT]

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