What exactly is it?
A debt-to-equity (D/E) analysis determines if the forecasted
debt level and capital structure of a company meet the arm's
length standard. In other words, it aims to establish an
approximation of conditions that are consistent with third-party
behavior.
As a simplified illustration, here are just some of the typical
transfer pricing (or D/E analysis) questions deliberated in an
intra-group loan arrangement:
- How much debt could the borrower
(related party) have obtained from a third party and service
without defaulting on its obligations?
- How much would a lender have charged?
And how much would the borrower be willing to pay?
In a nutshell, the arm's length principles should be
respected when determining whether a loan is a loan for fiscal
purposes. This is in line with Article 9 of the OECD Model Tax
Convention, including the corresponding commentaries, and also
referred to in the OECD discussion draft relating to the
