Transfer pricing: A linear model to price intra-group loans

Intra-group transactions can range from basic trades such as the transfer of goods to more complicated products, services or even financial transactions. The question of transfer pricing arises, for both firms and regulation entities, from the complexity of dealing with several countries and facing many different fiscal systems. This paper aims at providing a new transfer-pricing approach for the evaluation of arm’s length rates in the context of intra-group loans. The particularity of the proposed method is to rely on the aggregated market information rather than on few comparable transactions. The research first analyzes the main drivers of inter-company loans using linear models to determine the relevant pricing factors. The determination of six main drivers results in four models to be tested against usual transfer prices for loans. As in transfer pricing practices, the Interquartile range is calculated for different scenarios of loans and lead to a set of intra-group rates. The predictions of the same scenarios using the four models are then compared to simulation and resulted in satisfactory outputs. The work is concluded by suggestions, solutions and potential improvements.