In today’s financial landscape, credit ratings are pivotal in assessing credit risk, providing a common language for decision-makers in lending and investment. As global markets face heightened uncertainty and interest rates, understanding creditworthiness is paramount, mandated by tax jurisdictions worldwide as per OECD guidelines.
This paper explores the intricacies of credit ratings, examining methodologies and rating types. From top-down to bottom-up approaches, we delve into the art and science of credit ratings, offering practical insights to enhance their application in real-world scenarios, facilitating informed decision-making and risk management.
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In today’s volatile macroeconomic climate, heightened by high interest rates, intra-group loans have become focal points for tax authorities. The application of an arm’s length interest rate in pricing these transactions has thus gained paramount importance. Organizations typically employ four main approaches—Comparable Uncontrolled Price (CUP), Cost of Funds, Economic Modeling, and Safe Harbors—to determine arm’s length prices for related-party intercompany loans.
Among these methods, CUP stands out as the preferred choice, endorsed by the OECD and tax authorities. However, rigor and precision are vital in its application, especially concerning benchmarking analysis, comparable transaction screening, and adjustments for comparability.
This paper outlines essential strategies for multinational organizations to ensure Transfer Pricing compliance and optimize financial outcomes in the face of increased scrutiny on intra-group loans by tax authorities.
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In a landscape fraught with uncertainty, marked by seismic geopolitical shifts, fragile supply chains, inflationary pressures, financial market volatility, and demographic transformations leading to labor shortages, businesses find themselves navigating a relentless wave of disruption.
These challenges strain operations, productivity, and financial stability, underscoring the pivotal role of CFOs in harnessing corporate treasury functions to steer through these turbulent waters. The urgency to bolster the treasury’s capabilities has never been more acute, prompting the evolution towards Treasury 4.x.
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By 2025, 80% of the domestic high value clearing (RTGS) volumes will be ISO 20022—based with all reserve currencies either live or having declared a live date, as Swift are currently estimating. Furthermore, we are now witnessing the digital transformation of cross border payments through the migration to the ISO 20022 global messaging standard across the Swift network. Combine these initiatives and it becomes clear on why ISO 20022 XML is becoming the global language of payments.
This change will have wide-ranging impacts across messaging standards, operational models, market infrastructure and payments capabilities. It is critical to address the challenges faced by the payments industry in a more demanding, globalised, and heavily regulated world.
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In response, multinational enterprises (MNEs) are compelled to proactively develop robust Transfer Pricing documentation to mitigate the risks associated with potential challenges from tax authorities. The Transfer Pricing implications of intra-group loans must be thoroughly assessed, as penalties for non-compliance are often severe (e.g., withholding taxes, penalties, potential double taxation, deniability of interest deduction, time consuming disputes, etc.).
This paper offers an overview of the current tax authority environment concerning financial transactions, and presents several recommendations for improving the Transfer Pricing position of MNEs for these transactions. Finally, it outlines how the Zanders Transfer Pricing Suite assists its client in addressing these challenges.
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In today’s dynamic economic landscape, characterized by economic instability, a global pandemic, and geopolitical turbulence, businesses are under immense pressure to adapt and thrive. Treasury functions, once considered backstage players, are now front and center in navigating these challenges.
This white paper delves into the evolving role of corporate treasury, offering insights into five key observations poised to reshape the function in the coming years. From enhancing productivity and performance to addressing geopolitical risks through regionalized strategies, and harnessing the power of data-driven decision-making, this paper provides a comprehensive overview of the shifting landscape.
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In this latest whitepaper, in a series of annual reports from the Association for Financial Professionals (AFP) and Zanders, we take a closer look at “The Future of Corporate Treasury Teams.” The role and mandate of corporate treasury have evolved significantly in recent years.
This role used to be focused on liquidity management, funding and risk management from a more group perspective. Now, rapidly changing business models combined with increased internationalization and regulatory changes and an acceleration of innovation have transformed treasury into a proactive business partner supporting the individual needs of operating units in terms of liquidity, risk management and working capital management. Despite the expanding role of responsibility corporate treasuries are also facing budgetary pressure to
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Download the whitepaper, and get free access to the AFP webinar (valued at $50) scheduled on February 6. Follow this link to get access.
IFRS 9 became mandatory as of January 2018. This means that financial institutions (FI) now have four full years of historical data on IFRS 9 reporting numbers available. One of the key aspects of IFRS 9, and its main difference with the Basel framework, is the requirement to make lifetime expected credit loss (LECL) estimates for facilities with a worsened credit rating. For the required yearly monitoring exercise of IFRS 9 models, it has been hard to test the accuracy of lifetime estimates.
The main reason for this is that for many products, the lifetime is not fully resolved (yet) i.e., retail mortgages typically have a maturity of 20 to 30 years. With the accumulation of more and more data, FI’s should start thinking about approaches to verify how well lifetime estimates reflect the actual lifetime credit losses. Apart from that, backtesting exercises are useful in themselves since performing them helps FI’s to gain experience in backtesting LECL estimates. This experience will be of great value in the years to come.
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The COVID-19 pandemic is creating many challenges for credit risk models. At the start of the COVID-19 pandemic, government(s) immediately started introducing relief programs and financial institutions began implementing payment arrangements, such as payment holidays, and introducing moratoria on loan agreements. Defaults were prevented or at least delayed. This resulted in adverse effects on the modeling side of credit risk.
On the one hand, existing models forecasted an increasing level of credit risk because risk drivers in the models deteriorated to, sometimes, extremely adverse values. On the other hand, the observed default rate decreased because of relief programs. This ‘disturbed’ the historical relationship between risk drivers and defaults that are captured by the credit risk models currently in place.
This white paper discusses the potential impact of the COVID-19 pandemic on credit risk models. We explain some of the possible modeling methodologies to enhance credit risk techniques to capture the COVID-19 crisis scenarios. We have identified three techniques that can be applied: Quantile Regression (QR), Markov Switching model, and Panel Smooth Transition Regression (PSTR).
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