Transfer Pricing and Financial Transactions

S. 301. Theoretical Background

1.1. Overview of OECD Guidance on financial transactions

One of the more debated topics in Chapter X of the OECD Transfer Pricing Guidelines (TPG), which was released in the financial transactions guidance (FT Guidance) on February 11, 2020, is the guidance contained in Section B.1. It concerns the accurate delineation of a financial advance and whether the arm’s length principle is to be relied upon for concluding that it is appropriately labelled as a loan or perhaps should be treated as a contribution to equity capital.

The rationale behind it is clear. Unlike independent entities, entities within an multinational enterprise (MNE) group are incentivized to optimize returns for the MNE group and maximize shareholder value. As such, it might occur that the use of (intragroup) debt financing exceeds what an independent party would do with the resulting excess interest payables being used to affect profits accruing in a specific jurisdiction. Stated differently, the balance of debt and equity funding of a borrowing entity of an MNE group might be dissimilar from how a third party would finance itself under a similar situation.

The debate in this regard was whet...