Loan interest rate: part 1, market data

Significant judgements on arms` length loan interest rate determination have recently come into force (please see my LinkedIn publication of July 28, 2022). According to these judgements, as ruled by the Court of Latvia, the following main principles govern comparability analysis. Firstly, an actual transaction (not a formal one) shall play the main role in delineating economically relevant characteristics. Secondly, the Latvian tax administration shall respect the transfer pricing method that a taxpayer chose. Thirdly, comparability factors for the search of loan interest rate would be the amount of the loan, the time of issuance, and the term of the loan (hereinafter called - the Courts` recognized comparability factors). Notwithstanding some certainty reached, there are still a number of challenges in relation to arm`s length interest rate for which I will further write the series of LinkedIn articles.?

Finding the market of loan rate: Example

On August 2022, the EUR loan rate, given the Courts` recognized comparability factors are identified, according to the data of the Latvian market is 1,87%, as opposed to the data of another country market, where the EUR loan rate, for the same comparability factors, is 3,03%.?

When would the transfer pricing adjustment risk appear?

In case a Latvian company had borrowed funds from the foreign associated company and had applied the highest available rate of 3,03%, i.e. the market data of another country, as opposed to the Latvian market rate of 1,87% that is the lowest available rate. The difference of 1,16% then should have been multiplied to the principal amount of the loan representing the excess amount of interest that should have been taxed in Latvia at 43%, including CIT, penalties, and late interests.?

What would be the relevant arguments and "but what if(s)"?: Example

The origin of funds that were transferred to the Latvian company is in that other country (not Latvia!) of the foreign associated enterprise (the said funds originate from the equity of the associated lender or from the borrowed funds of such lender in a market). Here, some sample "but what if(s)?" could raise.?

But what if the associated lender borrowed funds from a bank operating in a country other than the country of the associated lender?

Should we choose the data of the country, where the associated lender operates, or the data of the country (i.e., not the country where the associated lender operates) from which the funds had been borrowed before such funds were transferred to the Latvian associated company??

Conclusion

The country of the loan data may be a relevant and questionable economic characteristic that affects the identification of comparability factors for establishing arm`s length pricing of financial transactions - the choice of the data of a particular market (country) loan rate.?