A is a wealthy entrepreneur that owns several entities, one of which is Company B, a real estate developer. Due to Company B’s aggressive real estate development, it runs out of cash for its working capital. As such, it borrows PhP5 million from BDO - Gorordo Branch, Cebu, the same branch wherein A has savings accounts. C, the bank manager who knows A to be the owner of Company B and several other entities, approves the loan immediately and charges only 3% interest rate per month. D, the bank staff handling the loan transaction was wondering for such low interest rate. Thus, the following conversation ensued between C and D: D: We normally charged 12% per month for this kind of transaction, I am wondering why Company B’s loan will be charged only 3% for interest. Can you enlighten me please? C: Oh, Company B has several sister entities which will likely support Company B and prevent from default. Basically, Company B has low credit risk. Remember economics, interest is a function of credit risk? So a lower credit risk, ceteris paribus, will mean a lower interest rate. Determine what is the transfer pricing implication on this
A is a wealthy entrepreneur that owns several entities, one of which is Company B, a real estate developer. Due to Company B’s aggressive real estate development, it runs out of cash for its working capital. As such, it borrows PhP5 million from BDO - Gorordo Branch, Cebu, the same branch wherein A has savings accounts.
C, the bank manager who knows A to be the owner of Company B and several other entities, approves the loan immediately and charges only 3% interest rate per month. D, the bank staff handling the loan transaction was wondering for such low interest rate. Thus, the following conversation ensued between C and D:
D: We normally charged 12% per month for this kind of transaction, I am wondering why Company B’s loan will be charged only 3% for interest. Can you enlighten me please?
C: Oh, Company B has several sister entities which will likely support Company B and prevent from default. Basically, Company B has low credit risk. Remember economics, interest is a function of credit risk? So a lower credit risk, ceteris paribus, will mean a lower interest rate.
Determine what is the transfer pricing implication on this
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