On 3 July 2018, the long-awaited draft guidance was released by the OECD on the Transfer Pricing aspects of financial transactions.
The guidance relates amongst others to:
- the accurate delineation analysis in relation to capital structures: identifying the commercial and financial relations, options realistically available and the actual delineation or requalification of financial transactions. Would unrelated parties enter in similar transactions and/or capital structures?
- the economically relevant characteristics in relation to terms & conditions of financial transactions: an in-depth analysis is required on the contractual terms, functional analysis, characteristics of financial products or services, economic circumstances and business strategies of the relevant entities involved.
- specific issues/financing transactions including guidance on:
- treasury function: the identification and allocation of the economically significant risks in accordance with Chapter I of the OECD TP Guidelines;
- intra-group loans: the two-sided approach, use of credit ratings and pricing approach to determine an arm’s length interest rate;
- cash pooling: rewarding the cash pool leader versus the cash pool members and the provision of cash pooling guarantees;
- hedging: the qualification of a service in case of a centralized hedging activity and determining an at arm’s length remuneration for this service;
- guarantees: explicit and implicit guarantees and five methods to determine an arm’s length guarantee fee where appropriate;
- captive insurance: the economic rationale for a captive insurance transaction, substantiation and the pricing of premiums.
The guidance is presented as a non-consensus discussion draft as the Committee on Fiscal Affairs (CFA) and its subsidiary bodies could not come to a consensus view on all the discussed topics, such as the use of the arm’s length principle versus local legislation to determine the capital structure of an entity. Comments and feedback are invited by 7 September 2018.
The discussion draft itself can be found on: http://www.oecd.org/ctp/beps/oecd-releases-beps-discussion-draft-on-the-transfer-pricing-aspects-of-financial-transactions.htm
Due to the increased focus and scrutiny of tax authorities on intercompany financial transactions, this draft may provide new arguments to both taxpayers and tax authorities to defend or challenge intercompany financial transactions. If you would like to know more about this guidance, please get in touch via email@example.com.
Round tables to come
A more in-depth analysis of our specialized finance team will follow shortly. Furthermore, Quantera Global will be hosting round table discussions on this topic in the upcoming months in Amsterdam, London and Milan. For more information, please feel free to contact us and we can then share the invitation with you.