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OECD Transfer Pricing Guidance on Financial Transactions

OECD Transfer Pricing Guidance on Financial Transaction

The Guidance is expected to have a significant influence over intra-group financial transactions. It will be incorporated as Chapter X in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

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Board Member, International Business Unit

KPMG in Cyprus

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We expect that the Guidance on Financial Transactions should be considered by Cypriot companies that have cross-border financial transactions with related parties.

Scope of the Guidance

The intention of the Guidance is to determine if conditions of financial transactions between related parties are consistent with the arm’s length principle. It covers the following key areas:

 

  • Determination of whether a loan should be regarded as a debt or considered as a contribution to equity;
  • Accurate delineation of financial transactions for transfer pricing analysis;
  • Determination of a credit rating of the borrower, in particular, taking into account possible support that the borrower may receive from the group to meet its obligations in case of financial difficulties;
  • Determination of the arm’s length remuneration for intra-group loans;
  • Other specific issues: cash pooling, financial guarantees, captive insurance etc.

 

Cyprus will introduce new transfer pricing rules this year. These rules are expected to be aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Thus, any intra-group financial transaction taking place in 2020 should also be considered from the point of view of the Guidance on Financial Transactions.

Taxpayers should be particularly careful with two topics covered by the Guidance.

Firstly, it is worth considering whether the balance of debt and equity of the borrower corresponds to the arm’s length principle, i.e. whether an independent company operating under similar conditions will agree to such balance. If it is not the case, then part or even all of the loan may be considered as a contribution to equity.

Secondly, it is the credit rating of the borrower. In most cases, the credit rating is one of the most important factors for a transfer pricing analysis. Usually, it is estimated using borrower’s standalone financial statements and publicly available credit risk calculators. At the same time, since the borrower belongs to the group, it is likely to receive support from the group in case of financial difficulties. Thus, the fact that the borrower belongs to the group can affect its credit rating and, consequently, results of transfer pricing analysis. Whether this is the case depends on the relative importance of the borrower for the group.

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