Financial Transaction Transfer Pricing Guidance: OECD

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The OECD has published its eagerly awaited transfer pricing guidance on financial transactions, in a technique it has never produced before and as such is trial guidance.
The OECD states that the document closely follows the discussion draft published in July 2018, under the base erosion and profit shifting (BEPS) project. Its purpose is to clarify the application of the principles included in the 2017 version of the OECD Transfer Pricing Guidelines for Multinational Enterprises & Tax Administrations to financial transactions.

It will therefore contribute to global standardisation and subsequent reliability in the interpretation of the arm’s length principle; as well as helping to avoid transfer pricing disagreements and double taxation.

The key sections provide guidance on the determination of both risk-free rates of return and risk-adjusted rates of return, where a multinational enterprise is entitled to them. As well as tackling multinational conglomerate capital structures and other particular issues related to the pricing of financial transactions, such as:

Treasury functions & cash forecasting.
Intra-group loan assignment.
Cash pooling or sweep accounts.
Investment hedging.
Guarantees & captive insurance.
Tax advisors state that the guidance represents a significant step in the development of the OECD transfer pricing policy; being the first time that guidance on such transactions will be included. Moreover, its importance stretches beyond the OECD member countries, as it has been approved by the 136 members of the OECD’s Inclusive BEPS Framework.