On 11th February, OECD has published a new guidance on transferring pricing, the Transfer Pricing Guidance on Financial Transactions, which was a new development under the BEPS Action Plans, specifically under Actions 4 and 8-10. It signifies the first attempt to update the existing OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations for further specification of transfer pricing in financial transactions to improving efficiency and consistency of applying transfer pricing principles and preventing both disputes and double taxation.
Transfer Pricing refers to the behaviours typically found in intra-group trade within multinational enterprises (MNEs) to allocate costs and profits to more favourable tax jurisdictions for tax avoidance purposes. Transfer Pricing Principle is better known by the term arm’s length principle, which refers to a rule that the price of the goods or services traded within one MNE between different entities located in different tax jurisdictions should be determined as if they are independently functioning companies in the market. If prices can be freely decided between group subsidiaries or affiliated companies, market distortion or monopoly can be easily achieved by MNEs or such groups holding dominant market shares by means of profit shifting and tax evasion.
Here is a simplified overview of new contents in this new guidance. Actions 4 and 8-10 of BEPS Action Plans talk about interest deduction limitations, intangibles, risks & capital, and high-risk transaction respectively. Transfer Pricing Guidance on Financial Transactions being part of the Inclusive Framework on BEPS regarding these Actions has provided for more clarity in section B on the application of the accurate delineation analysis to capital structure of an MNE within an MNE group. Meanwhile it is also made clear that this section does not prevent countries from implementing domestic measures to address capital structure and interest deductibility. Other clarifications include outlining economically relevant characteristics for analysing terms and conditions of financial transactions, such as contractual clauses, functionality analysis, characteristics of financial instrument, economic environment and operational strategies. Sections C-E has addressed specific issues in relation to the pricing of financial transactions, include but not limited to treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance, which are highly elaborative on both the accurate delineation and the pricing of the controlled financial transactions. Section F, as the last part of the main body, provides for determinations of a risk-free rate of return and a risk-adjusted rate of return. This guidance is annexed into the OECD Transfer Pricing Guidelines as Chapter X in entirety with adjusted numbering.
For many, OECD rules and BEPS updates are of high relevance due to boosting trade between MNE groups and affiliated companies. Stay on top of news and seek professional assistance are always helpful to avoid the avoidable and keep your business as stable as possible. We are always here to hear your needs.
Global Connect Admin B.V. | Xuan Hao