The OECD recently published Transfer Pricing Guidance on Financial Transactions, an inclusive framework on BEPS Actions 4, 8-10. This guidance takes into consideration comments received in the July 2018 discussion draft on financial transactions.
The guidance represent an update to the OECD Transfer Pricing Guidelines.
This importance guidance presents guidance for:
Determination if the purported loan should be regarded as a loan
Treasury functions, including cash pooling, intracompany loans and hedging
Risk-free and risk-adjusted rates of return
These principles are significant in scope and consequences that also allow countries to implement approaches in their domestic legislation, so there will be areas of dispute as this new guidance is implemented and interpreted.
Under the mandate of the Report on Actions 8-10 of the BEPS Action Plan (“Aligning Transfer Pricing Outcomes with Value Creation”), Working Party No. 6 (“WP6”) has produced a non-consensus discussion draft on financial transactions.
Comments are due by September 7, 2018. The treasury function, guarantees, intra-group loans, cash pooling transactions and captive insurance are the broad agendas discussed.
The guidance is not intended to prevent countries from implementing approaches to address capital structure and interest deductibility under domestic legislation, nor does it seek to mandate accurate delineation under Chapter I as the only approach for determining whether purported debt should be respected as debt.
As this guidance is critical for establishing if an instrument is true debt, as well as transfer pricing implications for financial relationships, this discussion draft is critical to review and provide relevant comments.
The OECD’s discussion draft is referenced herein for review.
As MNE’s (anxiously) await the final Treas. Reg. Section 385 final regulations (for which the House and Senate seem unable to slow down Treasury’s intent) and its potential impact on cash pools and foreign-to-foreign transactions, Canada has proposed rules providing for deemed dividend and withholding tax treatment for certain cash pool arrangements, notwithstanding notional pool arrangements.
The perceived abuse of cash pools, albeit physical or notional, has trumped the basic business tenets and rationale of international business. As a result, significant complications have resulted in additional costs, compliance and regulatory oversight that stifles basic business transactions.
MNE’s with physical cash pools may have, or will need to, consider notional vs. cash pools as countries look at such opportunities with its sovereign right for revenues and source taxation. Notional cash pools are no longer safe, as a result.
These non-intuitive rules should introduce discussions between tax administrations and MNE’s located in their jurisdiction to truly understand business dynamics prior to enacting draft/final rules affecting such instruments. Until that time, MNE’s will have to consider restructuring that further begets questions of complexity and planning arrangements.
Details of Canada’s proposal are provided in EY’s Global Tax Alert provided as reference.
The controversial final Section 385 regulations are still being debated, with Treasury focusing on earnings stripping issues, although seemingly has heard valuable comments as to its detrimental effect on physical or notional cash pooling. Every MNE should have read the proposed Reg’s and educated their treasury and finance functions accordingly, which should be an immediate priority due to its expansive potential effect on treasury, legal and tax structures going forward.
The US House is set to release its tax blueprint next week, which may become more important if a Republican president is elected with potential reforms again in play.
EY’s Global Tax Alert discusses these topics and some BEPS updates.
PwC has conducted a survey, as referenced in the attached link, of transfer pricing aspects for financial transactions in over 40 countries in the Americas, Asia Pacific and Europe. The insightful information, current as of 1/1/2013, initially provides a comprehensive overview of intercompany loans, cash pooling and guarantees followed by transfer pricing details for each country.
Each country included in the survey provided responses to the following topics:
Transfer pricing rules and regulations, domestic / OECD guidelines
Intercompany loans (arms-length nature, transfer pricing methodologies, etc.)
Cash pooling; transfer pricing methodologies
Advance certainty via APA, etc.
Transfer pricing questions and issues re: intercompany loans and various aspects of financial transactions are becoming more common and complex as businesses are continuing global expansion. Accordingly, multinational tax and treasury departments need to be mutually aware of transfer pricing rules for arms-length principles, contemporaneous documentation requirements, and inherent risks / opportunities for intercompany financial transactions.
Evolving rules in this area dictate continual training, awareness and strategizing risks from a global tax and treasury perspective. Transfer pricing training should be provided at regional / global treasury conferences; conversely treasury should ensure tax is aware of new financing tools that arise in different markets to ensure alignment.