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Australia: Implications for Australian businesses, OECD transfer pricing guidance on financial transactions

Australia: OECD guidance on financial transactions

Financial transaction guidance from the Organisation for Economic Cooperation and Development (OECD) concerns entities that have international related-party dealings involving financial transactions, treasury services, guarantees, and captive insurance arrangements. The OECD transfer pricing guidance requires taxpayers to revisit intra-group financial transactions.


Related content

  • The OECD’s transfer pricing guidance on financial transactions details final recommendations regarding the arm’s length treatment of various financial transactions among related parties.
  • This follows release of draft guidance in July 2018 and applies transfer pricing methods to inter-company loans, cash pools, financial guarantees, hedging transactions, and captive insurers.
  • The OECD guidance is pertinent for Australia businesses given the Australian Taxation Office’s (ATO) focus on intra-group loans—particularly since its success in Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation [2017] FCAFC 62.
  • The recommendations will be included into the OECD Transfer Pricing Guidelines in relevant sections and as such, will ultimately constitute relevant guidance material for both taxpayers and the ATO to consider under Australian law when undertaking a transfer pricing analysis.
  • The interaction of this new OECD guidance with current OECD Transfer Pricing Guidelines, which have been interpreted in a number of relevant cases either involving financial transactions or involving the potential reconstruction of terms and conditions of an agreement, such as Glencore Investment Pty Ltd v. Commissioner of Taxation [2019] FCA 1432, will require taxpayer consideration.

Debt and funding arrangements

The OECD guidance on financial transactions discusses relevant factors that may be useful for determining whether part of a loan is to be considered quasi-equity in nature (p10.12).

A number of these factors are consistent with the ATO’s guidance contained in TR 92/11. Given this will ultimately form relevant guidance material that must be considered by the ATO, it will be interesting to see how these factors influence the ATO’s long-awaited (and yet to be released) Schedule 3 to Practical Compliance Guidance PCG 2017/4, which intends to outline factors for determining whether an interest-free loan between related parties could be either debt or equity in identifying the arm’s length conditions.

The OECD guidance also notes that in determining the appropriate tested transaction to consider, evidence with respect to how the multinational enterprise (MNE) group operates (such as its financing policy) will be of particular relevance (p10.16 and p10.36-37).

This is aligned to evidence that Australian courts have considered is relevant, and to ATO’s observed behaviour on current compliance matters, when the ATO will seek to understand group treasury policies and funding arrangements as a basis for deeming arm’s length conditions. As such, Australian taxpayers will need to be able to justify and support the terms of their intra-group funding arrangements in this context.

Further, the OECD guidance notes, consistent with other language in the OECD Transfer Pricing Guidelines, that independent enterprises will consider all other realistically available options available to them, and will only enter into a transaction if they see no alternative that offers a clearly more attractive opportunity to meet their commercial objectives. Similar language is noted (p10.58) when the OECD indicates a borrower would look for the most:

“…cost effective solution, with regard to the business strategy it has adopted.”

This language has often been interpreted in different ways by the ATO and taxpayers in recent matters, with the ATO considering this is supportive language to reconstruct terms of a debt arrangement to an option that may be cheaper. Taxpayers have often argued that the language needs to be considered in the context of undertaking a comparability assessment of the actual arrangement entered into (assuming the terms of existing arrangement can be evidenced to be commercially rational (per paragraph 1.122 of the OECD Transfer Pricing Guidelines)).

How the ATO responds to this guidance will be interesting, particularly given the comments of Justice Davis in the Glencore case when she noted that it was not open to the ATO to recast arrangements for the purpose of a comparative analysis (other than when the reconstruction provisions may apply) (refer to paragraph 40 of the judgement).

It is also important to highlight that the OECD guidance notes that both the borrower’s and lender’s perspective must be taken into account.  This may mean greater emphasis may be placed on the lender’s alternative investment opportunities.

With respect to the OECD five comparability factors [PDF 510 KB], the OECD guidance makes a number of key observations. These include the following points.

  • First, when a lender does not have sufficient economic substance, the OECD guidance postulates that the lending entity will not entitled to anything greater than a risk-free return. As such, taxpayers need to determine that there is appropriate evidence supporting that relevant risk control is exercised by the lender. Such evidence could be important not only for transfer pricing purposes but for other tax provisions that may be relevant, such as the diverted profits tax and the financing integrity measure contained in Australia’s new anti-hybrid rules.
  • Second, the OECD guidance lists key features and attributes that taxpayers may wish to document and consider. Again, a number of these align to the ATO’s guidance contained in TR 92/11 and include features such as quantum, maturity, currency, and whether the interest rate is floating or fixed.
  • Third, the OECD guidance notes that the business strategies of the parties may be relevant, and references an example of when a merger or acquisition may result in a different debt arrangement being entered into, and a greater reliance on financial forecast data.


For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Australia:

Tim Keeling | +61 2 9455 9853 |

Jane Rolfe | +61 3 9288 6341 |

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