S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's webinar about transfer pricing in the context of intercompany financing. My name is Ernest Breitschwerdt, and being part of S&P Global Market Intelligence heading up the European Credit and Risk Solutions Product Specialist team. The idea for this panel session today was to bring together the joint forces of the professional services world with, let's say, affected parties, which is the taxpayer essentially. I'm thereby representing the analytical solutions business, if you will, which is serving not just taxpayers and professional services, but also tax administration, by the way, so quite opportunistically. I will primarily moderate a very practical discussion around data, analytics and technology trends all in the context of tax compliance for intercompany financing transactions. Let me, first of all, start with some housekeeping notes. So we want this to be an interactive session, so please feel free to submit questions throughout the presentation or during the Q&A session at the end. Please also check out the widget at the bottom of your screen. We want to highlight the Related Content widget, which is filled with valuable content and thought leadership resources and the Survey widget. Please take the time to fill out our short survey at the end as we value your insights. This webinar also provides close captioning in English, so please click on the CC icon on the media player just below to activate it. Last but not least, chat with [ Global ] by clicking on the icon at the bottom of your screen and schedule a private meeting with our product specialists. Before I begin, please note that the activities of S&P Global Market Intelligence are independent and separate from S&P Global Ratings. S&P Global Ratings maintains a separation of analytical and commercial entities. Now we are getting to the fun part. I'm more than pleased to introduce Simone Trappolini, an experienced treasury and FX risk management specialist with a strong background in corporate finance, hedging strategies and capital markets. Currently, he serves as the Treasury Manager for FX and DCM at Carrier Corporation, where he manages foreign exchange, interest rate and liquidity risks. Simone has held key roles at prominent companies such as 3M, LeasePlan, BASF, and Shire PLC, leading FX, risk strategies and overseeing treasury operations. There, he has also been instrumental in developing funding solutions, for instance, and implementing advanced treasury systems. Simone holds a Master's in international management with finance from Trinity College Dublin and a degree on economics, finance and business administrations from Sapienza University of Rome. I'm delighted to also introduce Maxime, a very senior transfer pricing specialist, if I may say so, with over 13 years of experience working with international clients in France and Luxembourg with a particular focus on financial transactions. Maxime has hold expertise at several Big 4 firms in both countries before joining RSM France in September 2021. He's also a valued member of the RSM's European transfer pricing office. His extensive background and insights into transfer pricing will undoubtedly enrich our discussion today. Great having you on the panel, Maxime. While preparing for this webinar, we thought it's the best approach to briefly look back at the past 10 years and discuss the evolution of transfer pricing briefly. We will then, quite practically, address current challenges while also looking ahead, so what comes next. As we all know, the regulatory landscape surrounding international taxation has underdone significant transformations since the launch of the OECD base erosion and profit shifting initiative in 2012. These initiatives aim to combat tax avoidance strategies that exploit gaps and mismatches in tax rules. A notable development in this area is the introduction of Chapter X in 2020, with -- which specifically address the financial transactions, is the focus which we're also focusing on today. In parallel, there has been a marked increase in global scrutiny from tax administrations, which are now employing more sophisticated audit approaches to essentially ensure compliance with the following regulations. This enhanced scrutiny is facilitated by improved cross-border information sharing and cooperation among jurisdictions, which allows tax administrations to access and analyze data more effectively. First of all, the implementation of digital reporting requirements marks a significant shift towards increased transparency and accountability in international tax practices. These developments not only highlight, let's say, the growing emphasis on tax compliance, but also underscore the need for businesses to adapt to a more stringent and interconnected global tax environment. This evolving landscape necessitates that companies remain vigilant and proactive in their tax strategies, ensuring they align with the latest regulatory expectations and best practices, while also minimizing risks associated with noncompliance. And yes, great that we have 2 practitioners on the panel. And I'd like to, first of all, let's say, get the professional services perspective from you, Maxime.

So when you are looking back at the key shifts in transfer pricing approaches for financial transactions over the last, let's say, 5 to 10 years, what would you consider to be the top 2 or 3 key developments you have envisioned over time?

Hi, Ernest, and hi, everyone. From a TP perspective, what we observed the most is really an increase of focus from tax administration. In the past, it was a subject that was coming into the tax audit, but not always focused by tax administration. And what we observe now is that there's a systematic check on the financial transactions, so -- and this is quite new. For example, in France, in the past, they are requesting, for example, a formal offer from a bank. And now they are more and more aligned with the OECD guidelines, and they accept transfer pricing study to document interest rates. So it's a huge trend that we observe globally. More data, more guidelines and more focus from tax administration, the tax inspector. They are also more trained to analyze the specific financial transactions. So it's really a big change from a TP perspective that we observed the last -- I would say, the last 5 years. And we can also see that in the case law. So with the case law, we always take 2 to 3 years. We are always 2 to 3 years late, but we can already see a shift in the tax audit with more focus. They accept the OECD guidelines. So yes, we can see that it become a lot of more economic-oriented. In the past, we were more on the legal side. Now it's really an economic topic. And generally speaking, the increase of guidelines gives more comfort in terms of methodology. But in the other hand, it stressed the fact that you need to comply these specific guidelines to follow. And if you deviate from these guidelines, then you need -- you have to explain why. And then we also see still some local differences in terms of documentation, in terms of guidelines. So we still have these OECD guidelines, but some countries are more or less advanced in the -- in this transfer pricing topic. So it's always good to have a local expertise there because the methodology sometimes can vary. In some countries, for example, in Luxembourg, there's specific guidelines for back-to-back loans. You may not observe that in some other countries. So yes, those are, I would say, the 2 main evolution that we see on the market. And also the -- it's really something important to raise the fact that the tax administration themselves, they are more and more trained to check this topic.

Yes. Speaking of tax administrations, you just raised it. So Luxembourg being certainly one of the frontrunners, let's say, with regards to sophistication, already subscribing to advanced solutions since, I would say, 8, 9 years, do you see, let's say, a trend from other tax administrations also picking up and, in essence, bolstering their approaches? Or are there still, let's say, white spots of tax administrations, which just, in essence, rely what kind of analysis is handed in and then just challenging the taxpayer, if you will, or the auditor? What is your experience?

Yes. So it's interesting that you mentioned Luxembourg because, of course, they're a huge fund industry there. So they are quite in advance if you compare to other countries for the financial transactions. It's a country, for example, when you have back-to-back loans, you need also to document your capital requirements there. Not all the countries are doing that. So -- and also the -- for example, the debt capacity analysis is something quite new that we observe on the market. But yes, in Luxembourg, the -- it's like almost 10 years -- more than 10 years that we focus on the -- on margin, on capital requirements, on the interest rates. And if you compare, for example, to France. France, it came a bit at a later stage. But I will not say that they take an inspiration from the -- from Luxembourg directly, but I would say that they would more follow the OECD guidelines. I think now for tax administration, it's harder to say that I do not follow the OECD guidelines and I keep my own system. We can still see that -- this, for example, safe harbor route that we may have. For example, in Switzerland, in France, in some of our countries, there are safe harbor rates. But still, you can deviate from these rates if you have your specific transfer pricing analysis. So yes, I would say that Luxembourg is a good example because they cover a lot of financial transactions and also for the asset management, but it's another topic. But generally speaking, from a methodology perspective, we see that now there are more and more kind of an alignment in terms of methodology between the countries.

Yes. Okay. Thanks, Maxime. Simone, you have also been on the nonfinancial corporate, let's say, treasury side throughout your career. What are your, let's say, 2 to 3 key developments which you have seen over the last 5 to 10 years in terms of pricing and especially geared towards intercompany financing?

Yes. So thanks, Ernest. So I agree with Maxime, we could see that 10 years ago, there were less scrutiny by the tax environment, especially in other countries. Now they're really looking to scrutinize, have a proper check on the intercompany loans, both the policies and loans from the side. So here at Carrier, for example, we had a tax authority from Poland asking the agreement for some intercompany loans granted between 2019 and 2020. So they came back asking exactly the way how we calculate the interest, the benchmark used, the repayment there and the purpose. So I would say the focus, it's quite important at the moment from their side. It's important from a corporate perspective, maintaining an accurate record, updated the guidance, keep record of this. In the past, I've been in corporates where the pricing and the guidelines were updated once or twice a year. And now we see moving from quarterly to a monthly basis. Here at Carrier, we update record pricing guidance once a month, and we keep a record of this. Obviously, we also want to mention, we've been using Capital IQ from S&P, and this gives us a quite powerful tool because you give us the possibility to analyze based on the financial profit rating. Based on the rating, we can price the intercompany loans or deposit. So in case some tax authority come back and ask why you allocate a BBB or a BB, whatever, it is the rating we have an accurate record from our side.

Thanks, Simone, for mentioning also our systems even though we didn't pay you for that. It was freedom of speech, obviously, also in this panel session. Looking at, let's say, present challenges, perhaps I can elaborate a little bit about what we are seeing from our customer base, and then you can square that with your experience. So there's obviously one aspect of the delineation analysis, which is quite challenging for our customers, which is the tough part to analyze the debt capacity. We have developed already a solution for it 10 years ago. But for quite some time, it was just, let's say, sleeping on our template library, if you will. But over the last 2 to 3 years, we have seen more and more demand for that kind of delineation sub-analysis. So that is certainly an aspect which is also a present challenge, as it seems, for auditing companies and taxpayers, but also tax administrations alike. Then we have the assessment of the financial transaction itself. So there, you have obviously the credit risk scoring, drivers, breakdowns. These are the more, let's say, common themes, which have always been a challenge. But lately, there is also more the question how could I embed, for instance, qualitative factories, how should we embed the parental and government support overlay. Just speaking of parental support, even nowadays, we're seeing the practice from large nonfinancial corporations that they are just relying, let's say, on the group rating, analyzing their subsidiaries by 1 or 2 notches. And they said they have never been challenged, right? So that is still a practice in the market, which, in essence, is, to our opinion, not really in line with the absence principle as the OECD, in essence, is, let's say, formulating it. Then since the Chapter X release in 2020, there is a, let's say, new emphasis on issue over issuer risk assessments. And perhaps, Simone, I will just, in essence, challenge you in a second. If you're also essentially analyzing transactions or if you just essentially "analyzing the entity itself". Go ahead.

And so we do have the entity, absolutely. I would say that analyzing the debt capacity of an entity, it's quite important. We have to see that the entity is able to repay the loan. So that -- in this way, tax authority can also recognize this transaction as debt and not as an injection of pure equity.

Yes. Another challenge which we are seeing, especially also from tax administrations, is a request for loan data versus bond data. So we at S&P Market Intelligence offer, obviously, solutions for both, with the caveat that loan information is even more scarcely available than bond information. But nevertheless, there is that conundrum that many, especially tax administrations, are challenging the users of our systems or also of other, let's say, competitor solutions to actually drill down to the underlying securities, even if it's a, let's say, very exotic currency, a distressed risk assessment in an industry where you have very few observations. So that is certainly something which we see still as a challenge. And then the third pillar which I've noted down is obviously automation requirements. You mentioned it already, Simone, is that you are automating, let's say, your spread determinations on a monthly basis, if I'm not completely mistaken. Do you also run all your, let's say, transactions through that system or just a selected one?

No. That is correct. So we are now implementing the -- our treasury system. But the idea is, yes, to calculate spread once a month. We provide a credit facility to our entities. This credit facility, they are [ tiered ] by the entity. So based on the rating and the integration, we allocate them an intercompany spread. So they have the capability to borrow or lend from us, knowing what is going to be spread to apply this also on the currencies and on the tender side.

Okay. Great. We also thought that it makes sense that the audience is brought into the panel session, a little more interactive. So we would like to ask the following. First of all, how often do you perform a capacity analysis when documenting the absence character of an intracompany? Maxime also was referring to and what I'm also observing in the market as a request from our customers. Essentially, you have 3 options to answer: never; always; or, c, it depends on local requirements. And we are eagerly awaiting your answers, so please answer that question now. Okay. So here we go. 16% have answered never, 1/3 always, or 50%, is the reigning one, it depends on local requirements. Maxime, I think that is -- is that what you would expect essentially with regards to the debt capacity analysis?

Yes. If I was a local tax inspection, I would be really happy with this -- with the results. So it's a good point. So yes, when we look at the market for the time being, we see that most of the case, the debt capacity are not done. But it depends also by the type of clients. It's also a new topic, relatively new topic. There is no strict guidelines on how to perform the debt capacity analysis. And of course, it is part of the delineation analysis. It's an interesting part. It's true that when we think about financial transaction, we think about the interest rate, of course, but we should also focus on the debt capacity. We could also focus on the capital requirements depending on local requirements. So that's why I think it's really encouraging the fact that this -- at 52% that we look at local jurisdictions because, of course, these capitalization rules, there are other type of tax rules that may impact the need of debt capacity. The other things that we see, so you have the capital requirements, you have the debt capacity, the interest rate. And we see more and more challenge, for example, on the rationality of the loan itself. So this is something we observe and it makes the link between the TP, so the general TP, I would say, the commercial TP, transfer pricing and the financial transaction. And what we see is that, sometimes, when you can have, for example, local limited risk distributor, that will be financed by the group with an intragroup loans. We observe the fact that some tax administration challenge the existence of the loan itself saying that normally, there should not be a loss at this level, so no intragroup loans. And basically that it was a double penalty for the subsidiary. So yes, it's a good -- I would say, it's an encouraging answer. And yes, I would recommend at least to check the local requirements and maybe not always perform the debt capacity. If you have the capacity to do it, it's better. But yes, it's really important to check the local requirements.

Yes. And then you have also essentially asked us to put in another question. Do you use local transfer pricing expertise to document your intragroup loans? So certainly, that's a challenge especially for you, right? You always fight for your customers. So let's see what the audience says. So do you use local transfer pricing expertise to document your intragroup loans? And I hope that everyone was able to click it. 50-50 split.

So I hope they will not -- we would not have 2 participants.

Yes. Exactly, exactly. I think the system is sometimes a little delayed. But here, is that encouraging for you? Is that what you're also seeing in the market? Or what is your perspective on, in essence, also, to a certain extent, outsourcing, let's say, the terms of pricing assessment to, yes, third-party consultants?

Yes. So in our case, what we observed, we have, let's say, 2 sides of situations -- 2 type of situation, the client that will anticipate the need of transfer pricing documentation. And we'll ask, okay, what would be the interest rate? So we have those type of requests. The other type of request that we have is the clients that perform themselves, let's say, the transfer pricing analysis. And then there is a tax audit, and then they require some assistance on our side to justify or to support the loan because you always have your OECD guidelines, which is a good element. And then there's local specificities. Some countries, they will also issue specific guidelines on financial transaction that they will inspire -- it will be inspired by the OECD guidelines, but they will change some element or they will add some requirements. So it's always good to check. But yes, it depends also on the size of the group. Some group, they have access to the data. They have access to the expertise. Some others, they don't, so they have to adapt. And then some countries will -- some clients will centralize the preparation of the transfer pricing documentation in a country and spread it in their network. And some of them will have really a tailor-made approach with the local expertise. Yes, it is something we recommend at an early stage. But yes, in both case, as we can review or we can perform the analysis, but it's quite encouraging that in 55% of the case this local expertise, I think it's a good result. We'll be encouraged to have more local expertise because, really, it can have a big impact in terms of tax auditor.

Speaking of challenges, you have listed a few, which obviously, your customers have and what you try to resolve. But what are, let's say, the challenges in the environment today for you as a professional services unit? What -- is it more, let's say, analytically? Is it more that you're exposed to various regulatory environments, which don't really add up to each other? What do you see?

Yes. In the past, there are a lot of challenge about the comparable themselves, so as we can do for other type of benchmarking study. And then tax administration realized that maybe the topic will not be at the comparable side, but maybe more on the credit pricing side. So this is a shift that we observed. Now we have more and more challenge about the use of the tool. For some countries, it was considered in the past, maybe 5 years ago, as a black box. So therefore, it was not accepted. Now they are more open minded. They start to understand the tool, to accept it as well. And we see more and more challenge about the criteria that we put in the system, the granularity that we want to have in the transfer pricing analysis. So because the financial transaction is, I would say, the less subjective topic in terms of transfer pricing, you have clear guidelines from the OECD guidelines. You have a specific credit rating tool, and you have also a list of bonds or loans depending on what you want to document. So it's -- there's less subjectivity. And I would say that for tax administration, it's easier to challenge this because there is -- it's easy to track. You have access to the data. When you look at the financial statement, it's something that you can easily see. You can easily see either the existence of the loan or you can easily see the nonexistence, for example, of a guarantee that is provided by the group, these kind of things. So I would say that it's easier for the tax administration, but they are more focused on the substance and on the criteria that you use on the credit risk tool.

Okay. Simone, do you share, let's say, the kind of financial services perspective? Or do you have different, let's say, challenges as a, let's say, taxpayer as the one which is essentially affected?

From our side, the part that every time that we run intercompany loans, we have some internal guidelines then we have to follow. Obviously, if we have a tax audit from different countries, they might require the way how we calculate what kind of spread we use, how we calculate the spread, what is -- even the formula sometimes, they are asking to calculate the interest. If we are able to stand this and showing that these are our internal guidance and we have followed step by step, then we should be fine. But of course, there is -- every time we want to run financing in one of the key entities around the world, then it's always to keep in mind their local tax. And sometimes, you can even -- the interest rates that we are using, what kind of benchmark is the appropriate one is the interest rate or the spread that's too high, if these entities looking to fund itself and using maybe a local lender, what will be the credit spread or the interest that you're going to get? Some other entities or corporates that have been, they have as a policy then, every time companies looking to borrow cash, they have to first get a quote internally because the entities was cash rich. So decrease the amount of exposure and debts that you have versus third party and use the cash that we have. That could also be another challenge from a tax authority and see why you are borrowing internally when externally it would cost you less. But obviously, it's difficult and -- to prove which is the most efficient way.

Okay. With regards to the most efficient way, you asked us to essentially ask the audience to give their flavor with regards to how frequently do they actually review and update the spread applied to intercompany loans and deposits. So here, we have 5 possible answers: monthly, quarterly, semi-annually, once a year, or a talk when needed. So we would appreciate if you would just, in essence, select an answer. And I'm just giving the audience another 5 to 10 seconds. So let's see what we are getting back. A talk when needed is the main answer, more than 50%. Once a year, 26%. You are in the camp of the 4.3% only, Simone, so monthly is a rare circumstance. Is it, let's say, in line of what you also hear from other practitioners in corporations you're dealing with? What is your response?

I would say it's surprising from my side, especially the one, adopt. I've been in 5 different corporates. Obviously, they have all different internal guidelines, but the one that was updating with less frequency was quarterly. So it's quite surprising to me to see that the guidelines and the spread is updated once a year. Not to me to say which one is the correct way, but what we saw in the past in previous experience is in an environment where interest rates can go up and down quite easily, this is reflected on the cost of funding and ultimately on the spread that you are going to apply to the entities looking to borrow capital. So you might be showing an interest rate too low or too high. And if, let's say, the entity is looking to get funds from you at 2% when outside on the Street, they are funding at, let's say, for 4% that they will take from you. But at this, sometimes, you might also add hedging cost, which ultimately will get into a loss for the entity lending. And here we are with the principle of is this really arm's length principle. So giving an interest rate below what is the market at the moment.

Yes, yes. We certainly also have to consider, let's say, the structure of the audience, right? They might be smaller, let's say, nonfinancial corporations, which only, let's say, update their lending, their revolvers once a year. So therefore, you see these kind of answers. But what we have also seen in the past, especially from the professional services side of things is that they are challenged with interest rates, which they just have to defend. But Maxime, you said something which you've also observed in your customer base that your approach, "Dear Maxime, we have granted a loan 2 years back at 5%. Please help us in defending it because we are getting challenged."

Yes. And I would say it's the majority of the case for the time being. Especially when we have foreign clients, especially the case with the U.S. clients, they may have a different approach in terms of risk, risk management. To give you a concrete example, we saw, for example, some loans, intragroup loans that were on the paper, so it was on the financial statements of the company. But there were, for example, no loan agreement, for example. In this case, we were first challenged by the interest rates. So it was first a challenge, but we were able to defend the interest rate because it depends how granular you are with the methodology. This is also a good point with S&P is that you can really tailor-made your analysis to -- really to match the client's situation. But what we see that even if you defend the interest rate, if you don't have the adequate substance, then they can say, "Okay, you have an arm's length interest rate. But at the end, you don't have a contract. So therefore, I deny the existence of this loan. And therefore, the interest payment that was paid to the U.S." So this is the first scenario. And then the second point was say, okay, you are limited risk distributor and you have a huge amount of loss. You should not have this loss. And therefore, you should not have this intragroup loan. And then it make the link with the global TP policy of the group, and it start to become not a mess, but a challenging topic. So this is something we observe. Yes, it's -- especially, for example, when there's a 12% interest rate, those type of high interest rate. In France, it's quite easy. You have a safe harbor rates. If you go above, you need to document that. But sometimes, for example, the -- you have local safe harbor rates that are really not -- that can really hardly be considered as being arm's length, because it will not take into consideration the currency. It will not take into consideration the maturity, the industry or the other factors, the seniority of the loans. So there's a lot of factors they will not take into account, but those are the safe harbor rates. And of course, if you deviate, so basically, if you follow the arm's length principally, you should deviate from this rate. And then they start to document this. So yes, we -- I would say it's the -- half of the time, it's in the case of a tax audit, and we have to document the past, taking also into consideration that it can -- if there is already a loss, it can -- the tax administration can also challenge the loss. And when we talk about financial transactions and interest, the difference between a 7% interest rate and a 2%, for example, safe harbor rates, it can be quite important. So especially if you have a EUR 30 million or EUR 100 million loans, the impact can be really, really important.

Okay. So let's essentially sum up the, let's say, current challenges. We're seeing a trend also on the tax administration side, fortunately, for more, if you will, professionalism, more professional systems, right? But also on the other side, even nonfinancial corporates are, in essence, equipping themselves to defend better their tax policies, if you will. That is at least a little of the sense with which I'm getting out the discussion, especially comparing it to 5, 7, 8 years ago. And so now let's switch gears again and let's look a little more into the future. On the following slides, we have put together a few, let's say, buzzwords like more advanced pricing agreements, more complex transactions being scrutinized by tax administrations in the context of real estate asset financing, for instance. There is a big hub in Luxembourg. Also seeing it here in Germany that these transactions are getting challenged. And in general, as mentioned, we are seeing much broader application of tools like ours. And the trend will certainly manifest over the next couple of years, hopefully. Simone, perhaps, let's say, speaking in the context of a treasury unit and your organization, how you're conducting intra-operationally, are you planning more, let's say, automation, more processes around transfer pricing? Or are you currently, let's say, if you will, happy with the setup and it's just a BAU?

We definitely plan a bit more automation on this using some external tool, like Capital IQ, for example, that could be -- but we are implementing now a new treasury system. We want to benchmark ourselves with other corporates and see what they are doing from their side, see if there is also the possibility going forward to calculate the spread by using other tools that could maybe compare what is the price of Carrier Corporation when we issue a bond and then replicate that spread into our entities. So I would say that the future is definitely in the automation of this. It would be maybe interesting going forward to have some kind of tools that will help us also to visit by country or tailor what is the best practices sometimes. So something new that could help us to define better what is the current spread or interest rates to apply.

Yes. Okay. And Maxime, perhaps on a, let's say, related note, knowing that in the professional services world, there is less, let's say, the need to automate essentially the assessment of hundreds of transactions at once. As you mentioned, it's more a case-by-case assessment in most instances. But is your company already, for instance, adopting artificial intelligence or other automation systems to, in essence, deal with these kind of requirements in a more stringent and more efficient way? Is that something that you're planning at RSM?

Yes. When we talk about AI, it's always something we can think about a lot of things. But basically, we can also create those type of matrices that are quite useful for clients. For example, when they want to anticipate interest rate, they should apply for future investments. So those are the type of solutions that we can develop. You can call that AI. But at the end, it's just an Excel template that will gather a lot of data, and then you can anticipate what could be the interest rate. And then after the end of the year, you -- basically, you challenge the gap that may exist between the actual data and the data that you anticipate. So this is something we can do. But yes, it's -- the matrix of loans is something that a lot of clients are looking for to anticipate this. And it helps also in case of tax audit because you already have something to document. You can always say that it was the best practice at the time of the analysis. So yes, this is how we use the AI. The AI is more used, for example, for other type of benchmarks that we may also use using S&P. But another type of tool that are used mainly to do a kind of manual screening on the comparable that we don't use that much for financial transactions because, basically, the yield curve already capture a lot of data. It's more advanced that what we could create by ourself. But it's a mix of AI that you have and practice that we -- and specific tools that we developed internally at RSM.

Great insights. Perhaps, Simone, you can also share, let's say, general trends which you are seeing in corporate treasury or finance teams. If you can share already anything or what you've been speaking about with other treasurers about future developments.

Yes. So from our side, we obviously have to keep ourself updated in terms with the guidelines and whatever the tax authority needs from our side. As Maxime said, it's important have guidelines, which reflect the current environment and keep an accurate record on this.

Okay. And perhaps a question to you both before we are coming to the Q&A session. Do you see essentially a trend towards more complex structures being set up, for instance, mezzanine financings, including prepayment options, covenants, if you will? So all these kind of things which may make especially pricing more complex, is that something which you're seeing over the last couple of years? Or is that not really a trend? Or perhaps Maxime, you can start, and then Simone can elaborate a little bit.

We see more and more complexity, of course, depending on the case, especially on the debt capacity. For example, if you look at external comparable, most of the comparable, for example, will not use mezzanine lender in the structure. But it does not mean that from an internal perspective and from a transfer pricing perspective, you cannot reach a higher level of debt-to-equity ratio, for example. So this is the topic that we can work on and to see if we can reach, let's say, the objective of the clients, bearing in mind that some of them, the -- in the past, they were kind of safe harbor rates, maybe market practice with the famous 1%, 99% or the 15%, 85% that are more and more challenged. And now, let's say, there is a trend that, let's say, encourage the taxpayer to document this debt-to-equity ratio. And then you need to find a new solution. And also, of course, about the legal agreement themselves, they become more and more complex. If you look typically a bank loan, it's not rare that they do a 300 page or more. And if you compare to intragroup loans, sometimes, it's like 2 page. So you can see that there's an area of improvement in terms of legal documentation. But it's a new topic because you can have a lot of condition in your legal agreements, but then you need to actively follow the -- your agreement. You need to actively follow the market because, theoretically, when the fact and circumstances change, you should adapt a bit your -- at least your condition. So those are the type of elements that we can anticipate. And then, of course, try to price it using swap or any other elements that we may have. The legal side become more and more complex. And yes, it's -- and I would say it's more and more important in case of tax audits.

Yes. Interesting that you are saying or bringing up the topic of legal documentation. It goes a little into the direction what we discussed before with regards to please defend a specific spread, right? And we tweak the conditions that they fit. I think that is certainly not the right approach, but it's certainly still sometimes practiced. Simone, do you also see that on your side that you even have to work with your lawyers together to create this kind of intercompany lending contracts? Or is that something which you just pull out off the shelf and there is a 2-pager, like Maxime mentioned, which you always apply to on your intercompany loans?

Yes. I would say it's probably 50-50. Now we have a standard process and a standard document. But there are some cases also in my previous jobs, when you have to maybe create an intercompany funding for sometimes some JV, and that could be the case where your internal client that cannot be applied because, obviously, it's a joint venture. So there is another party to take into consideration. But before to grant funding with company loans, as Maxime said, it's important to get a debt capacity analysis because, first of all, you have to prove that the entity is able to repay the loan. Someone might say it's right pocket and then left pocket. But I guess, if the left pocket has that money get lost. So if it is not able to repay in the end, it's not really right pocket, left pocket. Sometimes, I can also see that based on the structure of the entity or the business, we -- sometimes. corporates use a standard template with a classic repayment of interest and initial and the notional bullet. So at the end, some entity might require because of their business something like an amortization or a relief of the interest after 6 months. So -- and that's why you really going to allow a specific loan. For these also, you might have to change the guidance. And -- but the important is that you record this from our side in terms of audit purpose, both internal and external.

Okay. So what would you say are the most important aspect of the loan contract, which should always be in it and which must be taken?

I would say, state clearly in the agreement the economic purpose, the interest rate that you're using and how you are -- the methodology where you calculate this and the repayment terms for covenants. I never saw an intercompany loans having some negative covenants. This is because you don't want to penalize the entity or in case they need to borrow externally. Typically, external lenders, they're not very happy to see that their loans has -- cannot repay or can only be repaid after the intercompany loan is repaid first.

Okay. Great. All right. That was already one question from the audience, essentially, which I've just baked in. So now, let's say, more formally open the floor for questions. Just a preemptive warning. Unfortunately, we won't be able to get through all questions live today. And if we don't get to your question today, we will certainly follow up with you directly. We've brought it up multiple times that the debt capacity analysis or, let's say, more broadly, the delineation analysis focused on substance and economic rationale, if you will, is key. From the audience, there is also a question that you've also received before and already. Has a best practice emerged in analyzing debt capacity analysis? Perhaps, Maxime, you from a professional services perspective, can elaborate a little on that question.

Yes. So basically, for the time being, there is no strict guidelines from the OECD. So we could anticipate the issuance of one really detailed guideline on that. But what we observed is that you can also have an approach based on the cash flow forecast, so -- which is different from the, let's say, peer analysis of comparables. So it's true that we have those 2 type of methodology. And then you need to check or maybe you can also, this is what we can recommend depending on the case, to make one analysis, for example, using a financial ratio and then a collaborative analysis using, for example, cash flow forecast. Those are the type of solution that can be provided to clients. In Germany, I know it's a hot topic. It really became a hot topic in Germany. So that's why we recommend for this to check with the local jurisdictions because it's quite new, and tax administration can be really challenging there. But yes, those are, let's say, the 2 main type of methodology that we see, but we could expect in the near future some really specific guidelines from the OECD on this topic.

Okay. Great. I hope that answers the question. There's another one. Simone, is it normal practice to use pricing or spreads of external loans and/or bonds to the parent entity in the group as a sanity check for the pricing spread on internal loans? Under this -- under the presumption that the intercompany loans typically should not have lower interest than the parent or group, what is your response to that one?

Yes. I would say absolutely is the leader -- the head of the group, let's say, it's a funding, it's issuing a bond or just doing an example, 5 years using mid-swap plus a spread. That should be, I would say, in the base especially because as the question said, the intercompany loans cannot have a lower interest than the cost of funding for the company to fund itself in the market. So that could definitely be something to see practiced internally to calculate the spread. You have your -- the head of the group, whatever is the cost of funding for that entity, we just measuring or replicate, maybe downgrading the entities by a notch.

Yes. Okay. Then there is a question about cash pool, something which we didn't address so far yet. So the question being, what are the best practices for managing in terms of pricing compliance risk related to cash pooling? Maxime, perhaps, you can elaborate a little more on that. The cash pool in our press cons, if there is a cash pooling question, then it's for Maxime.

Yes. I think if we could do a specific training or webinar on cash pool. But generally speaking, what we need to be focused on is the short-term character of the -- of these financial instruments. We have seen so far so much cash pool that we are supposed to be -- to manage just the excess of cash. And then it was a position that was lasting more than 2 years, 3 years. With the COVID crisis, we see that a lot. That company that we are engaged in a cash pool policy, we've, of course, interest rate that corresponds to our cash pool. So -- and then it was a long-term financial. So this is something that we observe a lot. The second interesting topic, of course, is that you need to determine both the deposit rate and the borrowing rate. This is also something to consider. And then you can tailor-made your cash pool depending on the currency, depending on the company that will borrow the funds. So those are -- and then you can have a lot of different practice on the cash pool. But yes -- and of course, the legal agreements that supports the cash pool policy. But yes, I would really focus on the short-term character of the cash pool and to be able to show it to the tax administration that it's a short-term instrument. It's not a long term and it's key. We see also a lot of cash pool where there are always the same entity, the deposits and some -- and then another entity that are drastically always borrowing the funds. And we see here there's a mismatch between what is supposed to be a cash pool and what is the actual use of the -- by the company of this financial tool.

And essentially, it works like an internal bank, right? So you should also use the industry classification for that cash pool being a retail bank or whatever, that it aligns essentially also the risk characteristics, right?

Yes. And also the -- what is something important to consider is the functional analysis. It's something that a lot of taxpayer forget, but you need to have a functional analysis because, at the end, you need to determine to whom the -- let's say, to which entity the profit should be allocated. So you need to document the benefit for the depositor, the benefit for the borrower. So it's more complex than it seems. And the challenge can come from a lot of different countries. So it's -- the cash pool is really a hot topic and it can be -- let's say we do a webinar.

Perfect. I think we have time for 2 more questions. Simone, perhaps, the following you'd like to take as we have elaborated a little already on the agreement itself on the legal prospectus. So to what extent should intercompany loan agreements include covenants? And how can the inclusion of selected covenants help support the debt characterization of the transaction?

Yes. So obviously, with the covenants, what you're doing basically is to stressing the fact that the entity wants to get their money back, basically. But again, personally, I didn't see any covenants in the intercompany loan so far because you would kind of see prior in a situation, if the entity is looking to borrow capital externally, that would not be so easy. Some banks might require to change this. So I don't see so far deals for intercompany loans or negative covenants. What we could see is maybe adding like in the legal agreement, something that specify in the case of default or giving the entity a time frame where they can make request on early repayment. So I saw in the past some of the entities or some corporates that I work adding this where they could specify the inclusion of early repayment or requiring the entity to repay in full amount -- the amount that they borrowed.

Okay. Great, Simone. Great insights from you both. I'm now asked to, in essence, unfortunately, conclude this webinar. I hope for all who have been on the call, it was insightful. We did cover a lot today. So if you have any follow-up questions, please use the Q&A widget, and we will be glad to assist. For those who want to review anything we have covered today, this session has been recorded. And you will receive a replay link tomorrow to access it on-demand at your convenience. When we close out the webinar, you will be routed to our webinar evaluation form. We'd love to hear your feedback, so please take a few moments to complete it. So all that's left to say is thank you to you, Maxime and Simone, for your great insights. And thank you all for taking the time to attend the session today. We look forward to you joining us again soon. Bye-bye.

Thank you.

Thanks.