Tax on the life of guarantees

If a guarantee is not called upon, then transfer pricing is likely to be its most significant tax consequence, affecting both interest deductibility for the borrower and the treatment of the parties in respect of the guarantee itself. On a default, various problems arise. These most obviously affect the guarantor, who will struggle to obtain relief for payments under the guarantee and may have to bear the cost of withholding tax, so may prefer to fund the borrower in order to stave off default. The borrower should also watch its own accounting treatment in case unexpected liabilities arise.