Transfer Pricing and Generalized Implicit Support Networks

Abstract

This paper generalizes the standard transfer pricing concept of implicit support flowing from a parent company to its subsidiary. The first extension is to assume that implicit support might be ve or -ve for the recipient. The second is to consider the possibility of implicit support flowing back from the subsidiary to its parent. The third extension is to consider the possibility of implicit support from one subsidiary to another in a corporate group. Under this view (based on aspects of portfolio, game and network theory) a subsidiary is not just at the end of a single implicit support link from the parent, but rather at the centre of a generalized implicit support network extending across the whole corporate group. Often this network will be able to be simplified. However more generally the quantification of implicit support, in terms of basis point effect on a subsidiary's arm's length borrowing rate and any intra-group premia that need to be paid, will require significantly more complex calculations and analysis than previously used.