OECD Publishes Transfer Pricing Guidance on Financial Transactions

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Friday, February 14, 2020 / 05:57 PM / KPMG Nigeria / Header Image Credit: OECD

 

On 11 February 2020, the Organization for Economic Cooperation and Development (OECD) published the transfer pricing guidance on financial transactions ("the report"). The report, which is further to the work of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action 4 (Limiting base erosion involving interest deductions and other financial payments) and BEPS Actions 8 - 10 (Aligning transfer pricing outcomes with value creation), is aimed at providing further guidance on the application of the arm's length principle to various kinds of financial transactions entered into by related entities.

 

The key highlights of the report include:

  • Guidance on economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions, and addresses specific issues related to the pricing of financial transactions (including treasury functions, intra-group loans, cash pooling, hedging, guarantees, and captive insurance).

  • Guidance on the application of the principles contained in provisions of the OECD Transfer Pricing Guidelines with respect to financial transactions.

  • Guidance on how accurate delineation analysis applies to the capital structure of a multinational entity (MNE) within an MNE group.

  • Direction on how to determine a risk-free rate of return and a risk-adjusted rate of return.

  • Insights into the accurate delineation and arm's length pricing of financial guarantees.

 

The report, however, noted that the guidance does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation.

 

It is expected that the guidance provided in this report will aid transfer pricing professionals, taxpayers and tax authorities in properly analyzing financial transactions.  Also, the report is expected to reduce incidence of disputes between taxpayers and the tax authorities in respect of related party financial arrangements.

 

Download Here - OECD Transfer Pricing Guidance On Financial Transactions

 

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