On 11 February 2020 the OECD released a report entitled Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10.

The OECD reports on base erosion and profit shifting (BEPS) issued in 2015 requested follow-up work on the transfer pricing aspects of financial transactions. The Inclusive Framework on BEPS was set up in 2016 to ensure the consistent implementation of the BEPS measures and allows non-OECD countries to participate in the BEPS follow-up and monitoring process.

The OECD guidance on transfer pricing for financial transactions issued by the Inclusive Framework follows the BEPS approach of accurate delineation of the actual transaction to arrive at the amount of debt to be priced. This requires identification of the economically relevant characteristics of the financial transaction by examining the comparability factors. These factors include the commercial or financial relations between the parties, the conditions and the economically relevant circumstances attaching to the commercial or financial relations.

The report accepts that countries have various approaches in their domestic legislation to look at the balance of debt and equity funding of an entity, including a multi-factor analysis of the characteristics of the instrument and of the issuing entity. However whatever the label placed on an instrument or financial transaction this categorisation is not a substitute for the transfer pricing analysis. Accurate delineation of the transaction must precede any attempt to arrive at the arm’s length pricing.

The report looks at the economic characteristics that are relevant in the analysis of the terms and conditions of financial transactions. This involves looking at the industry in which the MNE group is operating. The analysis must take into account the point in the economic, business or product cycle where the transaction is taking place; any relevant government regulations; and the availability of financial resources in the industry. Multinational groups operating in different sectors may need different amounts or types of financing as the capital intensity levels differ between industries.

Sections C, D and E of the OECD report look at various issues around the pricing of financial transactions, including treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance. The report emphasises the importance of building on the accurate delineation of the transaction and the pricing of the controlled financial transactions.

In Section F the report contains guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return.

The various sections of the report on transfer pricing for financial transactions are to be included as part of the OECD transfer pricing guidelines. Sections A to E are to be included as Chapter X and Section F is to be added to Section D.1.2.1 in Chapter I of the OECD guidelines.