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.
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.
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Australia:
Tim Keeling | +61 2 9455 9853 | firstname.lastname@example.org
Jane Rolfe | +61 3 9288 6341 | email@example.com
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