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The OECD Published Final TP Guidance On Financial Transactions

25 February 2020
On 11th February 2020 the Organization for Economic Cooperation and Development published its eagerly awaited transfer pricing guide on financial transactions. It is the first of its kind to offer guidance of financial transactions between branches of multinational corporations and comes as further work of the OECD/G20 Base Erosion and Pro Shifting (BEPS) Action 4 (Limiting base erosion involving interest deductions and other financial payments) and BEPS Actions 8 - 10 (Aligning transfer pricing outcomes with value creation), and is aimed at providing further guidance on the application of the arm's length principle to various kinds of financial transactions entered into by related entities.

The release of TP Guidance on financial transactions aims to reduce uncertainty about transfer pricing rules for financial transactions, contribute to consistency and help avoid transfer pricing disputes and double taxation but adds a larger compliance burden for taxpayers.

The guidelines are used by taxpayers and tax authorities around the world to determine and audit prices that entities of the same group charge each other for goods, services or intellectual property.

The key sections address multinational enterprises’ capital structures, treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance. The analysis elaborates on both the accurate delineation, the pricing of the controlled financial transactions, how to determine a risk-free rate of return and a risk-adjusted rate of return.

The guide also provides guidance on the determination of both risk-free rates of return and risk-adjusted rates of return, where multinational enterprise is entitled to them.

It should be noted that the published guide constitutes as ‘soft law’ and it is not directly applicable to taxpayers. However, this guidance is the manual that tax authorities around the world use when conducting tax audits. In Luxembourg, the administration is expected to follow the provided guidance when assessing transfer pricing of financial transactions from now on. The report also does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation.

The guide comes just as the Spanish tax authorities have announced Tax Control Plans for 2020, outlining the governments priorities for tax enforcement. They will implement a new automated system of risk analysis in transfer pricing in 2020.

Special attention will be given to the fulfillment of the documentation and information obligations of regarding transfer pricing, including the analysis of functions, assets and risks contained in the documentation.

The Spanish tax authorities will give scrutiny to the following seven key areas:
  • Corporate restructuring
  • Valuation of intragroup transfer of assets
  • Especially intangibles; deductions that could erode significantly the tax base, such as payment of royalties or intragroup services.
  • Financial transactions
  • Attribution of profits to permanent establishments
  • Taxation of new highly digitized business models
  • activities carried out by entities covered by functional structures characterized as low risk where entities have significant economic presence (e.g., those in manufacturing and distribution activities)
Due to the implementation of DAC 6, any intermediary (accountants, advisers, lawyers, banks etc.) who sell reportable cross-border tax arrangements to their other clients should report information on the arrangement to tax authorities of their home Member state. The new information will continue to greater transparency, facilitating both prevention and correction of evasive or elusive behaviors.

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