Transfer Pricing Aspects of Financial Transactions

The BEPS Monitoring Group has made a submission to the OECD consultation on the Transfer Pricing Aspects of Financial Transactions. It is available here, and suggests that the draft should have more urgency given the key role that financial structures play in tax avoidance by MNEs, as pointed out in the BEPS Action 4 report. Regrettably, the recommendations in that report would still allow excessive deductions for most MNEs in most industry sectors, so that strong transfer pricing rules will remain important, and we argue for simplified methods that would be both effective and easy to apply.


‘The use of third party and related party interest is perhaps one of the most simple of the profit-shifting techniques available in international tax planning’. These are the opening words of the final report of 2015 on BEPS Action 4 Limiting Base Erosion Involving Interest Deductions and Other Financial Payments. Consequently, that report recommended a best practice approach for limiting interest deductions by combining a fixed cap with a group ratio rule that would allow exceptions in some cases for the cap to be exceeded. Although relatively easy to apply, the final recommendations in Action 4 would still allow excessive deductions for most MNEs in most industry sectors. Hence, many countries will also apply transfer pricing rules to the internal financial relationships of MNEs, and the present discussion draft (DD) aims to refine the advice on application of these rules.

Despite the importance of financial transactions and their pervasive use by MNEs for BEPS purposes, readers of this DD gain no sense of urgency, no sense that this is an issue that affects the vast majority of MNE structures. The DD should be expanded to explain the pervasiveness of tax-motivated financial transaction structuring and emphasise that such transactions require careful and continual tax authority attention and a strong sense of skepticism.

This DD is well thought out and clearly represents considerable time and effort to create a cohesive document to provide guidance to taxpayers and tax authorities alike. While an excellent document in every sense of the word, its subtleties and attention to detail will be lost on the many undeveloped and even some developed countries that simply do not have the resources and skilled personnel necessary to apply these rules. In discussing the need for an accurate delineation of each financial transaction, the guidance makes clear that each situation must be examined on its own merits. This of course means that each financial transaction, of which there may be many within any MNE group and even within each MNE group member, must be separately examined on an ad hoc basis. This requires resources and specialist knowledge of each industry as well as of the complexities of corporate finance that is in short supply; for most tax authorities around the world, it is non-existent. The documentation of these rules is an expensive exercise for MNE taxpayers as well.

Hence, what is sorely needed are simplified methods that are simple to apply and that provide results that are fair to both taxpayers and tax authorities alike. This DD is a chance for the OECD to be a leader in considering such methods and providing meaningful guidance that would be of tremendous utility to many countries.

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