On 11 February 2020, the Organisation for Economic Co-operation and Development (OECD) published, as part of its Base Erosion and Profit Shifting (BEPS) project, the final guidance on transfer pricing aspects of intercompany financial transactions (the Report). For the first time ever, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD TP Guidelines) includes nearly 40 pages of groundbreaking guidance related to structuring and pricing of intercompany financial transactions. As the Report has been approved by the 137 member countries of the Inclusive Framework, its importance stretches beyond the OECD countries and will have significant impact on intra-group treasury operations of multinational companies from both non-financial and financial sectors. Here Krzysztof Łukosz, Associate Partner and his colleague Martin Druga, Manager, both from Transfer Pricing & Operating Model Effectiveness Group of EY Netherlands, provide an overview of the Report – with both the ‘good and bad news’.
The OECD TP Guidelines become relevant for corporate treasurers
The OECD Guidelines are intended to help tax administrations (of both OECD member countries and non-member countries) and multinational companies to evaluate whether the conditions of commercial and financial relations between associated entities satisfy the arm’s length principle. As Sections A-E of the Report are added to the OECD Guidelines as Chapter X, whereas the guidance on the determination of risk-free and risk-adjusted rates of return (Section F) is included in Chapter I, it is highly relevant for corporate treasurers to read through and understand the new OECD guidance. Treasury departments should subsequently evaluate existing group policies for intercompany financial transactions to see if they are in line with the arm’s length principle. Otherwise, the group’s exposure to transfer pricing disputes and double taxation is likely to increase.
Over recent years, transfer pricing of intra-group financing arrangements has remained an important area of tax controversy. This is expected to intensify, as less-developed countries have elevated their knowledge and experience by being part of this specific OECD workstream, and have already started applying the new concepts and approaches in practice. In many jurisdictions the guidance included in the Report will be directly applicable to both existing and new intercompany financial transactions.
The scope of the Report is quite broad, covering various types of intercompany financial transaction