On 11 February, the OECD issued final guidance on financial transactions covering areas from cash pools to captive insurers.
On 11 February 2020, the OECD released its long awaited guidance on financial transactions. The OECD has never produced final definitive guidance on financial transactions, so this is a huge change in the transfer pricing landscape. The Paper now becomes Chapter X of the OECD Guidelines and covers areas as diverse as cash pools and captive insurers. Although the guidance covers a lot of areas, there are a few key challenges that businesses need to be aware of in relation to their related party financing arrangements.
Who is this relevant to?
All groups with related party financing transactions including loans, bonds, guarantees, cash pools and captive insurers.
Who will it impact?
Key impacts are on:
Economic substance – Where treasury functions and the lender are in different jurisdictions, the lender may only be entitled to a risk-free return on its capital.
Contractual terms of a loan should match its purpose (e.g. a 10 year loan for managing short term working capital requirements could be recharacterised as a one year revolving loan at a lower rate).
Guarantees – Implicit support given to the borrower from the wider group (‘the halo effect’) should be factored out when pricing the guarantee. This is different from HMRC’s current practice.
Where the guarantee supports a greater amount of debt, the transaction could be recharacterised as a portion of the loan being from lender to guarantor (with the rest being deductible by the borrower as normal).
Cash pooling – Cash pools should be assessed by calculating and allocating the benefits of the cash pool to participants via lower interest rates, as the interest arising is a related party transaction.
Cash pools are short term arrangements only, and that if any balances become structural, then they should be priced as intra-group loans.
Captive insurance – Where a retailer uses a captive insurer to sell policies (e.g. extended warranties) to its customers alongside the sale of other products, the insurer may only get a routine return.
What action should be taken?
Clients with related party financing transactions should:
Further details are on our LinkedIn article.
For further information please contact:
© 2020 KPMG LLP, a UK limited liability partnership, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.