Forecasting Interest Rates for Future Inter-Company Loan Planning: An Alternative Approach

Inter-company loans do not draw considerable attention from Multinational Enterprises (MNEs) because they are not core business-related transactions, but planning an interest rate for them is actually important in countries with transfer pricing legislation. Nonetheless, Organisation for Economic Cooperation and Development (OECD) Guidelines do not point to concrete direction about methods or approaches to be performed in order to incorporate arm´s length principle in interest rates for future inter-company loans.Transfer pricing analysis for inter-company loans are usually performed applying the Comparable Uncontrolled Price Method (CUP method). The CUP method compares the interest rate of inter-company loans with statistical ranges built over interest rates of market comparable transactions. Interquartile Range (IQR) is a common statistical range to establish comparison. In accordance with the CUP method in transfer pricing analysis, Plunkett and Mimura mentioned corporate bonds markets are a rich source of data for identifying market interest rates and for which there is sufficient data to establish comparability" (Plunkett & Mimura, 2005).Aditionally, Plunkett and Powell suggest the use of data from corporate bond yields in accordance with credit rating of the borrower as supplementary (Plunkett & Powell, 2008)."