What would be the correct price (i.e., the arm’s length transaction) of a cash transaction under BEPS (Base Erosion Profit Shifting) Actions 8-10? That’s a key question which every treasurer of an international group needs to address. The right answer is far from easy to apply, but the guide currently being finalised for issue by the OECD helps to provide a clearer view and specifies what needs to be done.
The ‘right price’ for a cash transfer
Under the latest BEPS guidelines, an appropriate and fair transfer price also applies to all cash transfer operations. In practice, however, working out this ‘fair price’ is not always straightforward, and there is still a risk of seeing the operation reclassified. Some treasurers have not changed their modus operandi one iota and believe there is no problem with their as-yet unchallenged approach. It would seem apposite, however, to ask the question for every funding operation, especially as a guide is currently being finalised by the OECD in order to help treasurers determine the right margin to apply and the criteria to be factored into the equation.
It’s frequently forgotten, but the first major principle is to align the transfer price (TP) with the amount of value creation. Sections C, D & E of the guide specifically address cash pooling, intra-group funding, hedging, guarantees and reinsurance captives. When abstractions are made from the legal or fiscal rules, the capital debt ratio of an entity of a multinational company (MNC) should be the result of purely commercial considerations and left to the discretion of the group itself. The question is whether an independent entity operating in the same circumstances would benefit from the same borrowing conditions. The idea is to verify that the rate applied is well and truly ‘at arm’s length’ or whether it should in fact be regarded as a sort of payment or capital contribution. Each country can apply its own capital structure before considering the question of the acceptability of the level of the transfer, so this guide should be taken for what it is, an indication only. However, it’s fair to assume that the tax authorities will draw inspiration from it and alignment with them can only be a good thing. But each operation still needs to be analysed separately on its own merits rather than as a whole with others, and this involves more documentation and individual analysis.
It is therefore highly advisable to read the guide issued by the OECD itself, as it provides a framework and principles in terms of transfer pricing. It’s very likely that the tax authorities in different countries will draw inspiration from the guide and apply these recommendations for what is a very tricky practice. Eventually, a body of ‘case law’ will be built up and comparables will become established for defining the method for pricing a financial operation appropriately.