Τιμολόγηση ενδοομιλικών συναλλαγών – χρηματοοικονομικά μοντέλα σε χρηματοδοτήσεις

Recent developments in transfer pricing documentation have identified several challenges, as controlled transactions are becoming increasingly complicated and the Cyprus tax authorities are increasing the documentation required for the preparation and analysis of such transactions.

Transfer Pricing (TP) experts use different models to approach and analyse controlled transactions, since TP is more subjective than other areas of taxation and therefore sensitive to disputes, with tax administrations not always sharing a common interpretation. See the OECD guidelines:

10.106. The reliability of economic models’ outcomes depends upon the parameters factored into the specific model and the underlying assumptions adopted. In evaluating the reliability of economic models as an approach to pricing intra-group loans it is important to note that economic models’ outcomes do not represent actual transactions between independent parties and that, therefore, comparability adjustments would be likely required. However, in situations where reliable comparable uncontrolled transactions cannot be identified, economic models may represent tools that can be usefully applied in identifying an arm’s length price for intra-group loans.

Capital Asset Pricing Model (CAPM)

The capital asset pricing model (CAPM) is one of the most widely used models for calculating investment risk and the return an investor should expect. CAPM is based on the relationship between an asset’s beta, the risk-free rate and the equity risk premium (the expected return on the market minus the risk-free rate):

Expected return on equity = Risk-free rate + Beta × Risk premium

Re = Rf + β × (Rm – Rf) or Re = Rf + β × Pc

Due to the challenges in estimating each CAPM component, there are many opinions that the model has limitations.

Comparable Uncontrolled Price (CUP) method

The CUP method is the most direct way of ascertaining the arm’s length price, as it compares the price charged for property or services transferred in a controlled transaction to the price charged in a comparable uncontrolled transaction in comparable circumstances. Any difference between the two prices may indicate that the commercial and financial relations of the associated persons are not at arm’s length, and that the price in the uncontrolled transaction may need to replace the price in the controlled transaction. The CUP method works best where comparable products/services are available or reasonably accurate adjustments can be made to eliminate material differences.

Arbitrage Pricing Theory (APT)

An alternative to CAPM is the Arbitrage Pricing Theory (APT) model, in which an asset’s returns are predicted using the linear relationship between the asset’s expected return and a number of macroeconomic variables that capture systematic risk:

ER(x) = Rf + β1RP1 + β2RP2 + … + βnRPn

Where:

• ER(x) = expected return on the asset;
• Rf = risk-free rate of return;
• βn (beta) = the asset’s price sensitivity to factor n;
• RPn = the risk premium associated with factor n.

Conclusion

Each transaction is different, and each case should examine the market environment, collateral, economic infrastructure, terms and conditions, etc. Various approaches and tools exist to support the fair market value. At ACLA Auditors, we can assist you with the preparation of transfer pricing documentation using the appropriate mechanisms and tools. Contact us for further information.