Our previous article looked at the need for a taxpayer’s transfer pricing (TP) file to support his guarantee transactions, and explored a general approach to assessing whether a guarantee transaction is arm’s length. In this article we are discussing aspects to consider when the substance of guarantee transactions is analysed, and we are taking a closer look at methods used in analysing such transactions.
When it comes to performing a transfer pricing (TP) analysis of financial transactions, attention is usually paid to loans and cash pool transactions. Yet there are some other financial transactions between related parties that often fail to receive a proper assessment in the TP documentation: financial guarantees. The current market environment has more creditors such as banks asking for a guarantee before they lend to customers. In this series of articles we explore TP aspects of guarantees, compare different approaches to determining an arm’s length price of a guarantee, and analyse relevant case law.
To trace related-party transactions and particular steps they include, as well as the initiator of those transactions, the State Revenue Service (SRS) uses a variety of methods for obtaining information. We have discovered that as part of tax controls, silent administrative cooperation appears to occur in how information on the actual existence of transactions is exchanged. To obtain objective arguments and evidence and to identify the actual proceedings of transactions, the SRS requests explanations from persons named in documents supporting the transactions, including from the taxpayer’s former employees. In this article we explore how this cooperation takes place.
On 5 July 2022 the Regional Court passed ruling No. A420275316 on whether interest rates charged on loans between related parties are arm’s length. The ruling emphasises the significance of the economic substance approach and strengthens the understanding of whether the Bank of Latvia (BOL) statistics are suitable for analysing transfer prices (interest rates).
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