The OECD releases discussion draft on financial transactions
The purpose of the discussion draft is to provide guidance for determining whether the conditions of certain financial transactions between associated enterprises are consistent with the arm's length principle (“ALP”).The discussion draft highlights that, in determining the arm’s length conditions of financial transactions, the same principles apply as described in the OECD Transfer Pricing Guidelines (“OECD Guidelines”).
The discussion draft includes important guidance for multinationals on general pricing issues in relation to intra-group loans as well as on specific pricing issues regarding treasury activities, cash pooling, guarantees and reinsurance.
The first part of the discussion draft provides guidance on the application of principles surrounding the identification of commercial or financial relations as discussed in the OECD Guidelines. Specific pricing issues related to the pricing of financial transactions such as treasury function, intra-group loans, cash pooling, hedging, guarantees and captive insurance are addressed in the second part of the discussion draft.
The discussion draft is divided into four sections, namely:
Each section is also sub-divided into different sections. Section B.1 of the discussion draft elaborates on how the accurate delineation analysis, which requires an analysis of the factors affecting the performance of businesses in the industry sector in which the Multinational Enterprise (“MNE”) group operates, applies to the capital structure of a MNE within a MNE group. The discussion draft clarifies that the guidance included in this section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation.
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