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Factors of Credit Ratings for Transfer Pricing of Loans in European Conditions

Author

Listed:
  • Martin Boďa
  • Karel Brychta
  • Michal Ištok
  • Veronika Solilová

Abstract

In accord with international transfer pricing regulations, the borrower's creditworthiness is the main factor to be reflected in valuation of cross-border loan transactions between associated enterprises. However, trouble invariably arises for small and medium-sized enterprises that do not have an assigned credit rating. The aim of this paper is to determine the most reliable predictors of a company's credit rating for European entities facing missing rating coverage for the purpose of transfer pricing. Based on 2015-2019 data sourced from the Orbis database, the study examines key financial ratios and non-financial information that could be instrumental in reconstructing a long-term rating category of a company assigned by Moody's Investors Service. The results identify interest coverage as the most useful predictor. Therefore, a law-approved and tax-acceptable approach to pricing of financial transactions between unrated parties (i.e., without credit rating) should preferably exploit interest coverage as a link to the otherwise missing ratings.

Suggested Citation

  • Martin Boďa & Karel Brychta & Michal Ištok & Veronika Solilová, 2024. "Factors of Credit Ratings for Transfer Pricing of Loans in European Conditions," Politická ekonomie, Prague University of Economics and Business, vol. 2024(5), pages 727-751.
  • Handle: RePEc:prg:jnlpol:v:2024:y:2024:i:5:id:1421:p:727-751
    DOI: 10.18267/j.polek.1421
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    More about this item

    Keywords

    Transfer pricing; credit ratings; predictors of creditworthiness; interest coverage; European companies;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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