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OECD Release Landmark TP Guidance On Financial Transactions

by Ulrika Lomas, Tax-News.com, Brussels

20 February 2020


The OECD has released a report providing transfer pricing guidance on financial transactions, as part of its follow-up work on tackling tax base erosion and profit shifting (BEPS), under Actions 4, 8, 9, and 10 of the BEPS Action Plan.

In October 2015, as part of the final BEPS package, the OECD/G20 published the reports on Action 4 (Limiting Base Erosion Involving Interest Deductions And Other Financial Payments) and Actions 8-10 (Aligning Transfer Pricing Outcomes with Value Creation). Those reports mandated follow-up work on the transfer pricing aspects of financial transactions.

The report, released on February 11, is significant as it supplements for the first time the OECD Transfer Pricing Guidelines with guidance on the transfer pricing aspects of financial transactions. The OECD said the new guidelines will contribute to consistency in the interpretation of the arm's length principle and help avoid transfer pricing disputes and double taxation.

As well as updating the Transfer Pricing Guidelines, the guidance includes a number of examples to illustrate the principles discussed in the report. 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.

In particular, Section B.1 of the report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of a multinational (MNE) within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation.

Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions.

Sections C, D, and E address specific issues related to the pricing of financial transactions (e.g., treasury functions, intra-group loans, cash pooling, hedging, guarantees, and captive insurance). The OECD said this analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions. Finally, Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return.

Sections A to E of the report are included in the OECD Transfer Pricing Guidelines as Chapter X. Section F is added to Section D.1.2.1 in Chapter I of the Guidelines, immediately following paragraph 1.106.

TAGS: Transfer Pricing | tax | interest | insurance | captive insurance | legislation | transfer pricing | G20 | Other | BEPS

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