In October 2015, as part of the final BEPS package, the OECD published reports on Action 4 (Limit Basic Erosion Involving Interest Deductions and Other Financial Payments) and Actions 8-10 (Alignment of the Results of transfer pricing with value creation). These reports entrusted follow-up work on aspects of transfer pricing of financial transactions.
These reports entrusted follow-up work on aspects of transfer pricing of financial transactions.
The report published today is significant because it is the first time that the OECD Transfer Fixing Guidelines include guidance on aspects of transfer pricing of financial transactions, which will contribute to consistency in the interpretation of the duration of the principle arm and help avoid transfer pricing disputes and double taxation.
The 2015 BEPS Action Plan reports on Action 4 related to the limitation of the erosion of the base that implies interest deductions and other financial payments; and actions 8-10 on the alignment of transfer pricing results with the creation of value and mandatory follow-up work on transfer pricing aspects of financial transactions.
In particular, Action 4 of The BEPS Action Plan called for the development of: “… transfer pricing guide … with respect to the price of financial transactions of related parties, including financial and performance guarantees, derivatives ( including internal derivatives used in internal banks), and captives and other insurance arrangements. “
Under these mandates, the Fiscal Affairs Committee produced a draft consensus not agreed on financial transactions in July 2018. The draft debate aimed to clarify the application of the principles included in the 2017 edition of the Transfer Pricing Guidelines of the OECD.
In particular, the delineation analysis required in Chapter I, to financial transactions and also provided guidance with specific issues related to the pricing of loans, cash funds, financial guarantees and captive insurance.
The guide contained in this report takes into account comments received in response to the public.
This guide is important because it is the first time that the guidelines are updated to include guidance on transfer pricing aspects of financial transactions that should contribute to consistency in the application of transfer pricing and thus help avoid price disputes.
Transfer and double taxes. Sections A through E of this report will be included in the Guidelines as Chapter X. The guidance in Section F of this report will be added to Section D.1.2.1 in Chapter I of the Guidelines, immediately after paragraph 1106.
In addition, this report describes the transfer pricing aspects of financial transactions, including a series of examples to illustrate the principles discussed. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the Guidelines for financial transactions.
In particular, Section B.1 of this report explains how the precise delineation analysis of Chapter I applies to the capital structure of an MNE within an MNE group and also clarifies that the guidance included in that section does not prevent countries implement approaches to address capital structure and interest deduction under their national legislation.
Section B.2, on the other hand, describes the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D and E of this report address specific issues related to the price of financial transactions, for example, treasury functions, intra-group loans, cash pooling, coverage, guarantees and captive insurance.
The analysis elaborates both the precise delimitation and the price of the controlled financial transactions. Finally, Section F provides guidance on how to determine a risk-free rate of return and an adjusted rate for return risk.
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Guía de OCDE sobre Operaciones Financieras