Finland has interpreted the “new” guidance for Financial Transactions as merely a clarification of prior law.
This interpretation is not novel, and is a position sometimes taken in an audit, rightly or wrongly, for which taxpayers should be aware.
In tax administration statement No. VH/3605/00.01.00/2020, published July 1, Finland’s tax agency explained the relevance of the newly added chapter 10 of the OECD transfer pricing guidelines on financial transactions. With the sole exception of the new guidance on the relevance of a parent company’s credit rating in determining the credit rating of another group member for purposes of pricing intercompany debt, chapter 10 will be applied both prospectively and retrospectively, according to the statement. This includes the guidance on cash pooling, guarantees, captive insurance, and determination of risk-free and risk-adjusted returns.
“The new chapter 10 of the OECD transfer pricing guidelines on transfer pricing for financial transactions does not, in the opinion of the tax administration, contain fundamental new interpretative guidance, except for [determining] the creditworthiness of a separate company. Therefore, the guidelines can otherwise be used as a source of interpretation for tax years ended before the guidelines were published,” the statement says.
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.
As the OECD ventures forth in digital transactions and global minimum tax standards, it is always helpful to keep in mind the UN Practical TP Manual for Developing Countries, which adheres to the arm’s-length principle. Links to the Manual and the Committee of Experts on International Cooperation in Tax Matters are provided for reference.
In April 2019, a new chapter was added on Financial Transactions, Profit Splits and revised text on establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits.
Attachment A: the proposed new Chapter B on Financial Transactions. The draft discusses the importance of corporate financing decisions within multinational groups and how those decisions could lead to tax base erosion. The Chapter discusses interaction with rules and measures against base erosion; common types of intra- group financial transactions and of group financing departments; the process of actual delineation and relevant characteristics of financial transactions; the process and system of credit rating; potential transfer pricing methods, including the use of simplification measures/safe harbours; different types of intra group loans and relevant characteristics; determining the arm’s length nature of intra-group loans; different types of intra group financial guarantees and relevant characteristics; determining the arm’s length nature of intra-group financial guarantees; and available methods. The chapter also discusses cash pooling practices and captive insurance, without getting into further detail on the delineation and arm’s length pricing of those specific transactions. Different types of intra-group loans are mentioned, and the draft identifies four steps to determine the arm’s length nature of intra-group loans: (i) analyse economically relevant characteristics; (ii) accurately delineate the entire transaction undertaken as well as (iii) selection and (iv) application, of the most appropriate transfer pricing method.
Attachment B: Revision to the guidance contained in the Manual on the transactional profit-split method (Chapter B.3.3.) with the main focus being on seeking consistency of this guidance with the work done in the context of the Inclusive Framework on BEPS, while providing more practical examples.
Attachment C: A progress draft of the work on sections C.2. Establishing Transfer Pricing Capability in Developing Countries (previously C.5.); C.4. Risk Assessment (Previously part of C.3.) and C.5. Transfer Pricing Audits. The purpose is mainly to streamline the sequences of presentation and to eliminate overlaps in the current text.
The UN Transfer Pricing Subcommittee has provided a work designed to move forward its guidance in updating the UN Practical Manual on Transfer Pricing for Developing Countries. The paper provides three attachments addressing:
Financial Transactions, a new chapter
Profit Splits, revised text
Establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits, revised text
All three attachments are significant and timely issues, noting the EU and other countries similar emphasis on these topics.
The paper is a valuable read in understanding UN’s direction on the above issues, and is included as a referenced link.
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.