Paragraph 10.161 of the OECD Transfer Pricing Guidelines takes a specific approach to the accurate delineation of financial guarantees by recharacterizing guaranteed debt as a loan to the guarantor followed by an equity contribution to the legal borrower in certain circumstances. This article provides a critical analysis of this paragraph by exploring its legal background and also considering potential ramifications of the approach included in the paragraph from an international tax perspective. This article also presents a way forward on how taxpayers and tax authorities may review debt capacity of a borrower of guaranteed debt to establish the arm’s length nature of the financing arrangement.