On July 3, 2018, the OECD published a 43-page discussion draft on cross-border financial transactions. The OECD Transfer Pricing Guidelines (TPG) as well as most national regulations currently only contain rudimentary guidance on the subject of intra-group financing, meaning the discussion draft has been awaited with great interest. The publication of the discussion draft was announced about two years ago, but was postponed several times due to inconsistencies among the OECD member states. For this reason, it is not surprising that the discussion draft does not present a consensus of the OECD, but rather an overview of concepts regarding financial transactions.
78 interested parties, including T/A Economics and WTS Germany, as part of WTS Global, submitted comments to the OECD Discussion Draft1 . The following provides an overview of the most fundamental issues raised by T/A Economics and WTS Germany:
- We have urged that any further draft in relation to transfer pricing considerations for financial transactions (i) should primarily safeguard the arm’s length principle as the sole standard for assessing the conditions of the controlled transaction and thus not make any reference or give any consideration to non-economic taxation measures such as interest deduction limitations (BEPS action 4) and (ii) maximize measures to resolve double taxation issues (e.g. article 25 of the mutual tax convention).
- In particular, in our view, the discussion draft may be interpreted in such a way that it sets certain standard presumptions that could be considered to contradict the arm’s length principle, such as:
- The (rebuttable) presumption that all subsidiaries within an MNE group should be attributed the same level of creditworthiness as the group as a whole;
- The presumption that group treasury activities, and more particularly as a cash pool leader, would generally constitute a mere service provider not incurring any of the risks attached to the cash pool;
- The presumption that to qualify as a captive insurance entity entitled to file an insurance-related return, all (or substantially all) features of an independent insurer should be met, which in our observation feels like an “all-or-nothing” approach to transaction delineation; and
- The presumption that if a guarantee does not lead to a credit enhancement beyond the implicit group support for the borrower, the guarantee is presumed to provide access to more financing and thus, according to the discussion draft, the loan should be re-characterized as a loan to the guarantor followed by an equity contribution from the guarantor in relation to the original borrower.
Accordingly, we have suggested that the next versions of the discussion draft should touch upon these points.
- It should be appreciated that the freedom to finance is broad and that the rationale for capital structures within the boundaries provided by the market economy is very case-specific. Therefore, when taxpayers carefully substantiate their rationale for particular capital structures, taxpayers should be able to rely on any (sound) economic argument. Tax administrations should bear the burden of proof of whether such rationale would be abusive as a precondition for the requalification of debt to equity and vice versa.
- Whilst actual conduct in respect of financial transactions should obviously also be assessed, it should be recognized that contractual reality is not only a starting point for financial assets, it is, relatively speaking, the most important comparability factor in accurately delineating the controlled transaction.
- In our view, the discussion on the risk-free rate and risk-adjusted return does not specifically belong to the scope of financial transactions and should not be used as a single measure of return, certainly not for the purposes proposed – i.e., returns in the event of lack of control over certain assets.
Our complete set of comments can be accessed at the following link.
1 The discussion draft can be accessed at the following link: http://www.oecd.org/tax/transfer-pricing/oecd-releases-beps-discussion-draft-on-the-transfer-pricing-aspects-of-financial-transactions.htm
