New Transfer Pricing Guidance On Financial Transactions

On 3 July 2018, the OECD launched a consultation on the transfer pricing of financial transactions by publishing the first draft of a new chapter of the OECD Transfer Pricing Guidelines for Tax Administrations and Multinational Enterprises. Consultation comments were invited until the end of the consultation period on 7 September 2018. On 11 February 2020, the OECD published the final conclusions of its project in the form of a new chapter X of its Transfer Pricing Guidelines for Tax Administrations and Multinational Enterprises1 (except for certain text on the risk-free and risk-adjusted rate of return which will be added to Section D.1.2.1 in Chapter I, immediately following paragraph 1.106).

This new chapter can help to fill a large gap in the Transfer Pricing Guidelines, which has resulted in high profile disputes in this area having to be settled by courts around the world on the basis of expert evidence on how independent parties approach such transactions. The issues covered by the new chapter are especially relevant to Luxembourg, given its attractiveness to financial institutions and as a location for non-financial companies in which to place their group treasury centres.

The chapter recommends some controversial approaches and it is clear that all businesses with related party financial transactions will need to review how they price them, that the agreements are properly worded, that both parties are able to perform their roles in the transaction, that they actually do so in practice, and that the quantum of the transactions is not excessive.

The first part of the chapter provides guidance on the application of the arm's length principle to financial transactions, while the remainder provides guidance on the pricing of financial transactions such as loans, cash pooling, hedging, financial guarantees and captive insurance.

The key elements of the new guidance may be summarised as follows.

1. Application of the arm's length principle to financial transactions

   1.1. Identifying what should be treated as debt for tax purposes

   The new guidance states that one of its main purposes is to clarify the accurate delineation analysis under Chapter I of the Transfer Pricing Guidelines in the context of financial transactions. In this respect, it considers that the following economically relevant characteristics may be useful indicators depending on the facts and circumstances:

   the presence or absence of a fixed repayment date; the obligation to...