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Final OECD Guidance on Financial Transactions

Kevin Norton and Markella Karakalpaki review the OCED report 'Transfer Pricing Guidance on Financial Transactions: Inclusive Frameworks on BEPS


On 11 February 2020 the OECD issued its final report Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8–10 (“the Final FT Guidance” or “the Guidance”), which is now included as Chapter X in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations (“the OECD TP Guidelines”).

The Final FT Guidance is important as this is the first time that the OECD has provided specific guidance on the transfer pricing aspects of financial transactions. This is an area where significant disputes have arisen (and there have been a number of high-profile court cases across a number of countries), and the aim of the guidance is to contribute to the interpretation of the arm’s-length principle and help avoid transfer pricing disputes and double taxation.

The Final FT Guidance was published 18 months after the OECD’s initial non-consensus discussion draft on financial transactions.

The main areas addressed in the Guidance are:

  • Determining whether a loan should be
    regarded as a loan;
  • Accurate delineation of financial transactions;
  • Treasury functions:
    - intra-group loans,
    - cash pooling,
    - hedging;
  • Financial guarantees;
  • Captive insurance; and
  • Risk-free rate and risk-adjusted rate of return.

It is evident that some concessions were made to countries on difficult topics in
order to reach consensus. Chiefly, it allows countries to take an approach to address an entity’s capital structure (i.e. mix of debt and equity) under domestic legislation and does not oblige countries to follow the arm’slength principle as described in the Final FT Guidance. It also provides little clarity on the contentious issue of implicit support and the benefit to borrowers of being part of a group (discussed in more detail on the next page).

This article provides the details of the Final FT Guidance as well as some of the main considerations for taxpayers as a result of the guidance.

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