The 2015 report on BEPS Actions 8-10
The 2015 report on BEPS Actions 8-10 mandated follow-up work on the transfer pricing aspects of financial transactions. Under that mandate, the discussion draft, which does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, aims to clarify the application of the principles included in the 2017 edition of the OECD Transfer Pricing Guidelines (“Transfer Pricing Guidelines”).
Content of the discussion draft
Following the introduction, the discussion draft first focuses on the interaction with the guidance in section D.1 of Chapter I of the Transfer Pricing Guidelines, relating to the accurate delineation of controlled transactions.
Subsequently, the discussion draft addresses the following specific issues related to the pricing of financial transactions:
- The treasury function, including:
- Intra-group loans;
- Cash pooling; and
- Guarantees; and
- Captive insurance.
Interested parties are invited to send their comments (by September 7, 2018) on any part of the discussion draft. However, throughout the discussion draft, the OECD has identified a number of issues on which feedback is particularly sought.
Although the discussion draft does not yet present a consensus position and is subject to commentary, it is - in our view - worthwhile to take note of the following points:
- In advance of an analysis of an arm’s-length interest rate, it should first be determined up to which amount an unrelated lender would have been willing to lend to the borrower – and which amount an unrelated borrower would have been willing to borrow. Based on such an analysis, Tax Authorities might argue whether or not (part of) a loan can be recognised in relation to the determination of an arm’s-length interest rate.
- In case a funder does not perform the decision-making functions to control the risk associated with investing in a financial asset, it should be entitled to no more than a risk-free rate of return. As proxy for determining the risk-free rate of return, government-issued securities are widely used in practice.
- The discussion draft invites commentators to consider whether the following rebuttable presumptions would be useful for the purpose of tax certainty and tax compliance:
- A rebuttable presumption to use the credit rating at the group level as the credit rating for each group member; and
- A rebuttable presumption to use the credit rating at the group level as a starting point, from which appropriate adjustments are made.
- The CUP (comparable uncontrolled price) method is the preferred method to determine an arm’s-length interest rate on intra-group loans. In applying the CUP method, internal CUPs should not be overlooked.
- In addition, arm’s-length interest rates can also be based on the return of realistic alternative transactions with comparable economic characteristics, such as bond issuances.
- A key consideration in analysing cash pool arrangements is whether or not a cash pool should be treated as something other than a short-term liquidity arrangement (such as a longer term deposit or a loan). In this consideration it may be appropriate to analyse (i) whether or not the same pattern is present year on year and (ii) what policies the financial management has in place.
- In case group members are financially interdependent, quite apart from any formal guarantee agreement, the economic risk of a guarantor may not change materially on it giving an explicit guarantee. As in such cases the guaranteed borrower may not be benefitting beyond the level of credit enhancement attributable to the implicit support of other group members, it can be considered appropriate to not charge a guarantee fee.
The discussion draft on financial transactions
The discussion draft on financial transactions can be accessed through the link below: