Politická ekonomie 2024, 72(5):727-751 | DOI: 10.18267/j.polek.1421

Factors of Credit Ratings for Transfer Pricing of Loans in European Conditions

Martin Boďa ORCID..., Karel Brychta ORCID..., Michal Ištok ORCID..., Veronika Solilová ORCID...
Martin Boďa: Matej Bel University in Banská Bystrica, Faculty of Economics, Slovak Republic; Jan Evangelista Purkyně University in Ústí nad Labem, Faculty of Social and Economic Studies, Czech Republic
Karel Brychta: Brno University of Technology, Faculty of Business and Management, Czech Republic
Michal Ištok: Matej Bel University in Banská Bystrica, Faculty of Economics, Slovak Republic; Brno University of Technology, Faculty of Business and Management, Czech Republic
Veronika Solilová: Prague University of Economics and Business, Faculty of Finance and Accounting; Brno University of Technology, Faculty of Business and Management, Czech Republic

In accord with international transfer pricing regulations, the borrower's creditworthiness is the main factor to be reflected in valuation of cross-border loan transactions between associated enterprises. However, trouble invariably arises for small and medium-sized enterprises that do not have an assigned credit rating. The aim of this paper is to determine the most reliable predictors of a company's credit rating for European entities facing missing rating coverage for the purpose of transfer pricing. Based on 2015-2019 data sourced from the Orbis database, the study examines key financial ratios and non-financial information that could be instrumental in reconstructing a long-term rating category of a company assigned by Moody's Investors Service. The results identify interest coverage as the most useful predictor. Therefore, a law-approved and tax-acceptable approach to pricing of financial transactions between unrated parties (i.e., without credit rating) should preferably exploit interest coverage as a link to the otherwise missing ratings.

Keywords: Transfer pricing, credit ratings, predictors of creditworthiness, interest coverage, European companies.
JEL classification: C51, H21, H25, H26, H70

Received: August 26, 2023; Revised: October 26, 2023; Accepted: October 30, 2023; Published: October 10, 2024  Show citation

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Boďa, M., Brychta, K., Ištok, M., & Solilová, V. (2024). Factors of Credit Ratings for Transfer Pricing of Loans in European Conditions. Politická ekonomie, 72(5), 727-751. doi: 10.18267/j.polek.1421
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