REGULATION: OECD Releases New Rules on Transfer Pricing on Financial Transactions.

As published on accountancydaily.co, Thursday February 13, 2020.


This is the first time the OECD has revised the Transfer Pricing Guidelines to include guidance on the transfer pricing aspects of financial transactions, to improve consistency around the interpretation of the arm’s length principle and help avoid transfer pricing disputes and double taxation.

The report, Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10, also includes a number of practical examples to illustrate the principles.

Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions.

IT focuses on how the accurate delineation analysis applies to the capital structure of a multinational enterprise (MNE) subsidiary within an MNE group, as well as the issues raised when determining whether a purported loan should actually be treated as a loan.

The guidance states: ‘It may be the case that the balance of debt and equity funding of a borrowing entity that is part of an MNE group differs from that which would exist if it were an independent entity operating under the same or similar circumstances.

‘This situation may affect the amount of interest payable by the borrowing entity and so may affect the profits accruing in a given jurisdiction.’

The guidance is not mandatory so countries can implement their own approach to address capital structure and interest deductibility under their domestic legislation, OECD said.

Section B.2 outlines the economically relevant characteristics that need to be taken into account when analysing the terms and conditions of financial transactions.

When identifying the commercial or financial relationship of controlled transactions in the context of the arm’s length principle, multinationals need to consider differences across industry sectors, factors such as the particular point of an economic, business or product cycle, the effect of government regulations, and the availability of alternative funding resources in a given industry.

Sections C, D and E address specific issues about the pricing of controlled financial transactions, including detail on treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance.

On intra-group loans, there is detail on determining whether the rate of interest provided for in a loan contract is an arm’s length rate.

OECD states that ‘it is important to consider the risks that the funding arrangements carry for the party providing the funds, and the risks related to the acceptance and use of the funds from the perspective of the recipient.

‘These risks will relate to repayment of the amount transferred, compensation expected for the use of that amount over time, and compensation for other associated risk factors’.

It also stressed that intra-group loans, while they do not go through the same level of scrutiny as required by banks if it was a commercial loan, still need to be considered based on the creditworthiness and credit risk of the associated subsidiary or group company.

Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return.

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