OECD’s transfer pricing guidelines on financial transactions published
The OECD has published its long-awaited guidance on the transfer pricing of financial transactions. The guidance covers the transfer pricing of intra-group loans, cash-pooling, hedging and guarantees as well as captive insurance, and will be added as Chapter X to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The guidance builds on the current OECD Transfer Pricing Guidelines and the importance of accurately delineating the actual intra-group transaction before considering the appropriate transfer price for such transaction. The phrase “accurately delineate” is used 17 times in the 40 pages of the new guidance.
The section in the guidance on the characterization of an investment as a loan or equity is not relevant in Finland since the Supreme Administrative Court has ruled (SAC 2014:119) that a loan cannot be recharacterized as equity solely on the basis of the transfer pricing adjustment provision is Section 31 of the Assessment Procedure Act. Based on the Supreme Administrative Court’s ruling, it could be argued that the OECD’s new guidance is not applicable in Finland when the guidance states that a guarantee that increases the borrowing capacity of the borrower/beneficiary may in some cases be regarded as the guarantor’s equity contribution to the borrower and the guaranteed amount as a debt of the guarantor.
Group affiliation has an impact on the transfer price
Countries have had different views on the effect of group affiliation to the arm’s length interest rates on intra-group loans. While some jurisdictions have taken into account the fact that the lender belongs to the same group as the borrower, the Finnish tax authorities (among others) have assessed the borrower as if it were a stand-alone entity not belonging to any group of companies. According to the new OECD guidance, the effect of group membership is relevant for the terms of the loans from third parties, and, consequently, should also be taken into account in intra-group financing transactions. In this context, it is important to consider whether the borrowing group company has such a role in the group that it would receive support from the rest of the group (so-called implicit support) in the event it faces difficulties in meeting its financial obligations.
New guidance on guarantees
While the process of setting arm’s length interest rates for intra-group loans has been established (and should only be amended to take into account the debtor’s group affiliation), at least in Finland there has been no guidance or established practice to determine the transfer prices of intra-group guarantees. Consequently, the new OECD guidance on financial guarantees is very welcome. The OECD’s new guidance confirms the common practice of not requiring any compensation for anything less than legally binding commitments (such as letters of comfort). The new guidance also recognizes that pricing cross-guarantees may be impossible, and that they do not necessarily warrant compensation for the entities involved.
Leading a cash pool as a service
Previously, the cash pool members may have paid short-term loan rates for their negative balances and received interest that corresponds to interest rates of bank receivables on their positive balances, while the benefit from the cash pool arrangement has accrued mainly to the cash pool leader. During recent years, the long-term positive balances with zero interest rates may have created transfer pricing issues for some group companies. In its new guidance, the OECD recognizes that the allocation of the benefits from the cash pool arrangement to the members and the cash pool leader is assessed on a case-by-case basis. However, in some cases the cash pool leader performs no more than co-ordination or agency functions for which is should receive no more than a service charge.
The Finnish Tax Administration has stated that it will take the new guidance into account and consider its effects later during the spring. Each entity that has entered into, or is planning to enter into, financial transactions between related parties should review their terms in light of the new guidance.