On 3 May 2018, the OECD published a long-awaited public discussion draft on the transfer pricing aspects of financial transactions. With this publication, the OECD has reached another important milestone in the BEPS saga. As all groups have such transactions, the importance of the discussion draft cannot be underestimated.
The discussion draft has been developed under the Mandate of BEPS Actions 8-10 – aligning value creation with transfer pricing outcomes. Besides guidance on the relevant transfer pricing methods as such, the paper focuses on:
- The interaction with the general guidance in Chapter I of the OECD TP Guidelines and in particular the accurate delineation of the transaction in the context of financial transactions. It stresses the importance of a genuine functional analysis covering both the lender and the borrower (two-sided analysis). It also emphasizes that all relevant terms & conditions of the financial transaction should be tested before concluding on the arm’s length character of the interest rates.
- Intra-group loans and approaches to determine the risk profile of the borrower on a stand-alone basis and by assessing the impact of implicit support. The document also refers to a cost-of-funding approach.
- Cash pooling with recommendations to clearly define the synergy effects stemming from the cash pool and which entity/entities are entitled to such effects.
- Financial guarantees and in particular when a guarantee fee may (not) be required. The draft discusses also situations where a guarantee set-up could lead to re-characterizing the guarantee into an inter-company loan or equity contribution.
- Captive insurance including the rationale for captive arrangements, the specific case of fronting arrangements, etc.
The OECD requests comments from interested parties by 7 September 2018.
For more insights and to understand the implications for your organisation, please contact David Ledure.