The Organisation for Economic Cooperation and Development (OECD) on 3 July 2018 published a discussion draft on the transfer pricing of financial transactions. A Dutch transfer pricing decree (2018) may have served as a source of inspiration for some parts of the discussion draft.
The discussion draft is follow-up work from the OECD/G20 base erosion profit shifting (BEPS) plan—more specifically BEPS Actions 8-10. The discussion draft offers guidance on how to apply the concepts developed in the new (2017) Chapter 1 of the OECD transfer pricing guidelines, such as the accurate delineation of transactions. It also stresses that the draft is not intended to prevent countries from addressing capital structure and interest deductibility under domestic legislation.
The OECD discussion draft addresses the economically relevant characteristics that are to be considered when analyzing the terms and conditions of financial transactions, including contractual terms, functional analysis, characteristics of financial products/services, economic circumstances and business strategies.
Key general themes arising throughout the discussion draft include:
The discussion draft addresses specific transfer pricing issues associated with financial transactions between related parties, such as the treasury function, intra-group loans, cash pooling, hedging, guarantees, and captive insurance. A number of these topics are also addressed in the recently issued Dutch transfer pricing decree of 22 April 2018, no. 2018-6865. The Dutch transfer pricing decree has replaced a 2013 decree which already included similar guidance regarding financial transactions, such as guarantees, loans and captive insurance.
It may appear that the Dutch transfer pricing decree may have served as a source of inspiration for some parts of the discussion draft, especially where guarantees and captives are concerned. The Netherlands may be considered a frontrunner where the transfer pricing of financial transactions is concerned. Already in the 2013 Dutch transfer pricing decree, specific sections were included on loans, guarantees and captives—resembling much of the guidance that has been included on these topics in the OECD discussion draft. In the discussion draft, there is also an increased focus on the functions performed regarding financial transactions and to whom the benefits of such transactions are to be allocated. Furthermore, the pricing of financial transactions is addressed in more detail.
The Dutch guidance has been subject to many discussions between taxpayers and the Dutch tax authorities. Therefore, additional OECD guidance on financial transactions may be viewed as leading to meaningful OECD guidance that can be used in practice.
A significant portion of the OECD discussion draft introduces the concept and characteristics of the financial arrangements, but in many areas, it does not yet provide the detail required to guide taxpayers through to a clear conclusion. The discussion draft is seeking stakeholder input when it comes to assessing the arm’s length debt capacity, but does not yet provide much guidance on this topic.
The OECD has invited comments on the discussion draft to be provided by 7 September 2018. In light of the content of the discussion draft, it is expected that commentators not only will seek to address the questions raised, but also encourage the OECD to elaborate on certain topics in order to help them to publish meaningful guidance that genuinely helps taxpayers to navigate some of the challenges in this area.
A non-exhaustive list of items from the discussion draft includes the following.
The above considerations regarding guarantees broadly reflect what is already included in Section 9 of the Dutch transfer pricing decree.
The final section in the discussion draft, dealing with captive insurance, mentions that a frequent concern when considering the transfer pricing of captive insurance transactions is whether the transaction concerned is genuinely one of insurance, i.e., whether a risk exists and, if so, whether it should be allocated to the captive in light of the facts and circumstances. The discussion draft mentions the following indicators that would typically be expected in an independent insurer:
These considerations regarding captive insurance broadly reflect what is already included in Section 10 of the Dutch transfer pricing decree. Furthermore, the OECD discussion draft discusses how to potentially determine the arm’s length prices of captives, including how to deal with group synergies.
Read a July 2018 report prepared by the KPMG member firm in the Netherlands
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