On 3 July 2018, the OECD published a discussion draft on the transfer pricing aspects of financial transactions as part of Actions 8 to 10 (aligning transfer pricing outcomes with value creation) of the Base Erosion and Profit Shifting (BEPS) project.
The draft does not represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, and contains a number of questions for respondents.
The first part of the draft provides guidance on the application of the principles in Section D of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations accurately to delineate actual transactions and, consequently, determine whether financial transactions between associated enterprises are consistent with the arm's length principle. A thorough identification of the economically relevant characteristics of the transaction is needed. This requires an evaluation of the contractual terms, the functions performed, the assets used, the risks assumed, the characteristics of the financial products or services, the economic circumstances of the parties and the market, and the business strategies pursued. Relevant factors might include the presence or absence of a fixed repayment date, the obligation to pay interest, the right to enforce payment of principal and interest, the existence of financial covenants and security, and the ability of the recipient to obtain a loan from an unrelated lending institution. Underpinning this analysis is the need to consider what independent parties would have agreed in comparable circumstances.
The second part of the draft addresses the factors to consider when accurately delineating and evaluating the pricing of financial transactions involving treasury companies, intra-group loans, cash pooling, hedging, guarantees and captive insurance.
While the draft focuses on accurately delineating the actual transaction, it is acknowledged that several approaches may be taken to address the issue of capital structure. Accordingly, the guidance is not intended to prevent countries from implementing other approaches to address capital structure and interest deductibility under domestic legislation.
Further information can be found at here.
Please send any comments to technical [at] ciot.org.uk by Friday 17 August.