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

Martin Boďa, Karel Brychta, Michal Ištok and Veronika Solilová

Politická ekonomie, 2024, vol. 2024, issue 5, 727-751

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.

Keywords: Transfer pricing; credit ratings; predictors of creditworthiness; interest coverage; European companies (search for similar items in EconPapers)
JEL-codes: C51 H21 H25 H26 H70 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.18267/j.polek.1421

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