The taxpayer loaned funds to a foreign wholly owned subsidiary, and charged a fixed rate of interest at 6% per annum on the loan. The taxpayer contended that, because this 6% rate of interest was greater than the LIBOR rate, the interest rate on the loan (i.e., international transaction) satisfied the arm’s length price.
The Transfer Pricing Officer, however, asserted that the arm’s length rate of interest was to be determined under the comparable uncontrolled price (CUP) method; and that financial institutions generally weighed four elements to determine whether to issue a loan (financial risk, credit risk, business risk, and structural risk).
The Transfer Pricing Officer’s position was that the loan made by the taxpayer to its foreign subsidiary (related party) was an unsecured loan, graded as “BB” with a yield of 17.26% for five years. Thus, a transfer pricing adjustment was recommended.
The Dispute Resolution Panel concluded that the interest rate would properly be either the taxpayer’s own domestic prime lending rate of borrowing or the rate at which income has been forgone, and determined that the rate of interest was to be increased by 3% for the risks associated with the loan made to the related party.
The tribunal held that, with respect to a loan made in a foreign currency to a related party, the prime lending rate had no applicability, and that the LIBOR rate was the rate of interest at arm’s length. Because the taxpayer charged interest at a rate greater than LIBOR, no transfer pricing adjustment was warranted.
Read a June 2013 report [PDF 197 KB] prepared by the KPMG member firm in India: LIBOR (without markup) can be adopted as Comparable Uncontrolled Price to benchmark interest rate charged to Associated Enterprises for loans given in foreign currency
Contact a tax professional with KPMG's Global Transfer Pricing Services.