Wednesday, 04 July 2018

BEPS Transfer Pricing Financial Transactions: Non-consensus, the proper term for a political agenda to discard the arm’s length principle?

On July 3, 2018, under the mandate of the Report on Actions 8-10 of the BEPS Action Plan, the OECD issued its highly anticipated public discussion draft on financial transactions. Interest parties are invited to provide their comments, and responses to specific questions raised, by September 7, 2018.


A rather late, non-consensus draft

The 2015 Final BEPS Report on Actions 8-10, Aligning Transfer Pricing Outcomes with Value Creation, indicated that further guidance will be provided on the economically relevant characteristics for determining the arm’s length conditions for financial transactions, and that this work would be undertaken in 2016 and 2017. The release of the public discussion draft now, in July 2018, therefore could be considered as a bit behind schedule.

The key reason for this, in our view, is that countries participating in the OECD Working Party 6 discussions could not reach consensus on some fundamental issues. The current discussion draft accordingly explicitly states that it constitutes a non-consensus draft, but that the intention is rather to provide stakeholders with substantive proposals for analysis and comment.


The discussion draft consists of 4 main sections (after a short introduction):

  • [Section B] Interaction with the guidance in section D.1. of Chapter 1 (of the 2017 OECD Guidelines), including:
    • [B.1] Identifying the commercial and financial relations; and
    • [B.2] The economically relevant characteristics of actual financial transactions (a discussion of the five comparability factors)
  • [Section C] Treasury function, including:
    • [C.1] Intragroup loans;
    • [C.2] Cash pooling; and
    • [C.3] Hedging
  • [Section D] Guarantees; and
  • [Section E] Captive insurance.

Some initial thoughts, after a first read

It may be hard to imagine that consensus can’t be reached on the application of the arm’s length principle, a global standard. However, (at least for now) there still is no consensus. In our view, this severely undermines the legitimacy of using the arm’s length principle as such. In our opinion, the arm’s length standard is very clear and the only reasonable standard – that may have its flaws (and practical difficulties) - but is not flawed in its entirety.

Also, certain parts of the text include, in our feeling, certain presumptions that the application of the arm’s length principle would be overly difficult to apply properly, where ‘short-cuts’ to the arm’s length principle are tentatively proposed. We refer to, for instance, the discussion on the use of credit ratings, and the subsequent questions [box C.2] to comment on rebuttable presumptions to use group credit ratings.

If such ‘short-cuts’ would indeed (as stated) merely serve to improve tax payer’s certainty over financial transactions and to limit the burden of tax compliance, we would welcome such deviations from the arm’s length principle. However, following the fact this public discussion draft is of a non-consensus nature and the apparent circumstance that for each transfer pricing problem there seems to be a myriad of diverging approaches in existence, we tend to be suspicious that countries involved in the discussions tend to follow their own (political) agendas rather than to come up with pragmatic solutions within the scope of the arm’s length principle, a global standard.

Therefore, we urge that our colleague transfer pricing professionals and the business community, as parties that have an interest in this subject, to provide their comments to the OECD on the basis of the technical merits of the arm’s length principle as a global standard, yet with propositions to pragmatically implement the arm’s length principle for financial transactions. We will…


Andy Neuteleers - Partner Transfer Pricing & Valuations T/A economics