The Organisation for Economic Co-operation and Development (OECD) has recently released a public discussion draft (PDF 1.09MB) on transfer pricing for financial transactions and invited input from commentators. The draft has been eagerly awaited and such is the complexity and difference in views surrounding financial transactions, the draft has been released as a non-consensus document.

The draft provides commentary on a number of topics including intra-group loans, guarantees, cash pooling, treasury functions and captive insurance arrangements. The draft also qualifies its observations and comments by noting that they are contingent on specific facts and circumstances.

A number of general observations from the discussion draft are summarised below:

• The importance of delineating transactions to ensure economically relevant conditions are identified is emphasised and the discussion draft suggests consideration of the OECD five factors of comparability may assist with this exercise. 
• By way of an example, the draft raises the possibility of an advance of funds (or a portion of an advance) being re-characterised for transfer pricing purposes.
• Treasury activities will generally be considered a support service to the relevant main value-creating operation and would be remunerated on this basis.
• Consistent with the findings of the Chevron transfer pricing case, in determining economically relevant conditions (including a credit rating), the borrower should be considered not as an orphan but as a member of the multinational group. Implicit parent support and external funding policies may also be relevant in the determination of a credit rating and an appropriate interest rate. 
• In establishing appropriate evidence, the discussion draft states that the use of bank opinions or quotes would generally not be considered sufficient evidence of arm’s length terms and conditions.
• With respect to cash pooling arrangements, the guidance indicates that any ‘group synergy’ benefits (e.g. an overall decrease in interest paid) should be shared appropriately between cash pool participants.
• Guarantee fees could be supportable if the guarantee is binding and unconditional, if it can be demonstrated that the economic risk of the guarantor materially changes (or in other words, that there is a benefit to the recipient from the guarantee over and above any implicit parent support). The draft also provides a number of options that may be useful in determining or corroborating guarantee fee pricing.

Given the discussion draft is a non-consensus document, it is possible that there may be a number of changes before guidance is formally released. However, it raises a number of technical issues which are complex and if included in formal guidance, could be challenging to substantiate with evidence. For instance, it will be interesting to see how the Australian Taxation Office's guidance on guarantee fees and derivatives, expected later this year, aligns to or addresses the OECD's discussion draft.

Given transfer pricing for financial transactions continues to be a high-focus area, taxpayers should continue to remain abreast of developments and ensure that appropriate evidence and documentation support is in place for their intra-group financial transactions.