Loan interest rate: part 2, rate affecting factors

This article is the continuation of my series of LinkedIn articles on loan interest rates (please see Loan interest rate: part 1, market data of October 26, 2022). This time you will read about the issue of whether, when setting or updating the conditions of the controlled loan agreement, the loan interest rate may be increased according to Latvian transfer pricing law and practice.?

Mixing various data: Example

Latvian transfer pricing law is flexible in this aspect, i.e. a taxpayer may use the data of uncontrolled transactions, say, the statistics of Latvian Bank on credit rates (MFI) as a base (for that reason please see my LinkedIn publications of July 28 and October 26, 2022). In addition, a taxpayer may use the information on comparable factors, in comparable circumstances, that affect the loan rate. In practice such a base rate may be supplemented by the cost of funding of the associated lender, say, if the base rate would be 3% cost of funding may be added to the interest amount. As a result of this, the interest rate would be higher than the base rate, say, 4%.?

When would the transfer pricing adjustment risk appear?

In case a Latvian company had not documented the division of the base rate and additional costs that were added to the interest amount. Latvian tax auditor could simply argue that the rate of 4% is higher than the market base rate of 3% and apply an adjustment rate of 43%, which includes CIT, penalties, and late interests, to such a difference of 1%.

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

In practice independent parties, particularly borrowers, count the total loan interest rate attached to the loan agreement by summing the base rate and other costs related to such funding transaction.?

But what if you may not present in the transfer pricing documentation any similar independent loan structures alike??

Should a similar structure in which the same associated borrower once counted the total interest rate when dealing with an independent lender be comparable with the one used in controlled borrowing transactions? Why shouldn`t you add additional costs to the principal amount of the loan as opposed to the loan interest amount? Should a reference to OECD Transfer pricing guidelines, specifically Section C.1.2.3. of Chapter X, together with sound transfer pricing documentation be enough to support the use of other costs???

Conclusion

Loan rate structure may be a relevant economic characteristic that affects the setting and the updating arm`s length pricing - include or not include additional costs is a factor affecting the price of the loan.?