Thursday, February 13, 2020

Tax Online 03/2020

OECD Transfer Pricing Guidelines

The OECD - Organization for Economic Cooperation and Development has published the Transfer Pricing Guidance on Financial Transactions Report, which defines the guidelines to financial operations within the scope of Transfer Pricing.

Relevant topics in the Report include:

• Guaranteed loans: companies should evaluate loans to a group company made using a guarantee from another group company. This transaction can be outlined as a loan to the entity that is providing the guarantee, followed by a capital contribution from that entity to the borrower of the loan.
• Documentation of Terms and Conditions for Financial Operations: Companies should evaluate whether all terms and conditions - and not just the interest rate - of intra-group financing, as well as their compliance with the Arm’s Length Principle, are properly documented.
• Cash-Pooling: the report indicates that, in general, the cash-pool leader performs no more than a coordination or agency function. Given such a low level of functionality, the remuneration of this entity as a service provider is limited. Any company with material income from this operation must be properly prepared and documented to substantiate this remuneration based on the performance of control functions over credit, liquidity and other risks.
• Credit Rating: the report provides guidance on the credit rating of companies. Accordingly, companies must determine and document the credit ratings of their subsidiaries in the light of this Report.

This Report also defines the way the pricing of financial transactions is established between related entities. It should be noted that, for the purpose of justifying the terms and conditions of financial transactions carried out between related entities, opinions and/or letters from financial institutions are not considered, as these do not constitute effective and current financial transactions.

According to the OECD, different views on various relevant topics are possible. In particular with regard to the issue of balance between debt and equity financing, the guidelines recognize that different approaches to capital structures and interest deductibility can be adopted by the legal regulations of each country.

All sections of this Report are now part of the OECD Transfer Pricing Guidelines.

This is a relevant step in the development of OECD transfer pricing guidelines, as it has been approved by the 137 members of the BEPS Inclusive Framework and therefore has implications beyond OECD member countries.

It is essential that groups of companies with intra-group financial transactions ensure that their Transfer Pricing policies are in line with the new OECD guidelines, ensuring that they have the appropriate documentation in support of these policies.

This report can be consulted here.

 

For more information contact us

João Aranha Partner jaranha@bakertilly.pt