OECD: Transfer pricing guidance on financial transactions

The Organisation for Economic Cooperation and Development (OECD) today released a report providing transfer pricing guidance on financial transactions.

The OECD report—Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10—is the first time that the OECD Transfer Pricing Guidelines include guidance on the transfer pricing aspects of financial transactions. It is anticipated that today’s guidance will “contribute to consistency in the interpretation of the arm’s length principle” and will help avoid future transfer pricing disputes as well as double taxation issues.

As further explained by the OECD in today’s release, the OECD/G20 in October 2015 published reports on base erosion and profit shifting (BEPS) Action 4 (Limiting base erosion involving interest deductions and other financial payments) and BEPS Actions 8-10 (Aligning transfer pricing outcomes with value creation). Both of these reports required follow-up work on the transfer pricing aspects of financial transactions.

The guidance in today’s report describes the transfer pricing aspects of financial transactions, and in particular:

• There are a number of examples to illustrate the principles discussed.
  
  
• There is guidance on the application of the principles contained in provisions of the OECD Transfer Pricing Guidelines to financial transactions.
  
  
• Today’s report elaborates on how the accurate delineation analysis applies to the capital structure of a multinational entity (MNE) within an MNE group.
  
  
• The report also clarifies this guidance does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation.
  
  
• The report outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions, and addresses specific issues related to the pricing of financial transactions (including treasury functions, intra-group loans, cash pooling, hedging, guarantees, and captive insurance).
  
  
• The analysis in the report elaborates on both the accurate delineation and the pricing of the controlled financial transactions.
  
  
• There is also guidance provided on how to determine a risk-free rate of return and a risk-adjusted rate of return.

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