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OECD publishes guidance on financial transaction transfer pricing

Thursday, 13 February, 2020

The OECD has published its eagerly awaited transfer pricing guidance on financial transactions, the first such guidance it has produced.

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 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations to financial transactions, and thus contribute to consistency in the interpretation of the arm's length principle and help avoid transfer pricing disputes and double taxation, says the OECD.

The key sections address multinational enterprises’ capital structures and other specific issues related to the pricing of financial transactions, such as treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance. It also provides 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.

The guidance represents a significant step in the development of the OECD transfer pricing policy, as it is the first time that guidance on such transactions will be included, say tax advisors EY. Moreover, its importance stretches beyond the OECD member countries, as it has been approved by the 137 members of the OECD's Inclusive Framework on BEPS.

'Multinational groups with intra-group financial transactions should assess whether their transfer pricing policies are aligned with the new guidance and ensure they have the supporting documentation in place to support these policies', says EY.

Sources