Fair Value Modelling of Loans and Guarantees within Transfer Pricing in International Holdings

Student: Kondyurina Alyona

Supervisor: Alexey Vladimirovich Buzdalin

Faculty: Faculty of World Economy and International Affairs

Educational Programme: Master

Year of Graduation: 2014

This article analyses different approaches to valuation of interest rate of intercompany loans and guarantees. Main focus of the article is on the approaches used by audit and consulting companies for determination of fair interest rate for intercompany loans and guarantees. Also new approach which is based on risk-adjusted return on assets is presented. In the first chapter of the article areas of transfer pricing in intercompany financing deals of loans and guarantees which are regulated by tax authorities are presented.  International guidance developed by Organisation for Economic Co-operation and Development is also described in details in this chapter.  Moreover, the author summarizes practical experience of international audit and consulting companies which offer consulting services regarding transfer pricing of interest rate in the intercompany loans and guarantees.The second chapter of this research paper focuses on the model, which determines fair interest rate for intercompany loans and guarantees based on risk-adjusted return on assets. The chapter presents theoretical <a href="http://www.babla.ru/%D0%B0%D0%BD%D0%B3%D0%BB%D0%B8%D0%B9%D1%81%D0%BA%D0%B8%D0%B9-%D1%80%D1%83%D1%81%D1%81%D0%BA%D0%B8%D0%B9/rationale">rationale</a> for choice of this particular risk-adjusted performance measure. Logic behind determination of the boundaries of fair interest rates of intercompany loans and guarantees so that they would be in compliance with tax regulations and guidance of Organisation for Economic Co-operation and Development is also discussed in this chapter.The third chapter presents detailed analysis of methods’ implementation on practical cases. It presents the step-by-step procedure which is used by international audit and consulting companies for determination of fair interest rate of intercompany loans and guarantees on one case from one of such companies. Also the method based on risk-adjusted rate of return is used on intercompany financing transaction between companies with official credit rating and between companies which don’t have one. For companies which do not have official credit rating logistic regression as credit scoring model is used. Conclusion states that the method based on risk-adjusted return on assets can be used in determination of fair interest rate for intercompany loans and guarantees.

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