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OECD’s Transfer Pricing Guidance on Financial Transactions


by Krzysztof Smach

16 March 2020 


The OECD released Transfer Pricing Guidance on Financial Transactions on 11 February 2020. The report includes many guidelines which may be helpful when determining the arm’s length fee for intra-group loans, guarantees and cash pooling.

Please remember, however, that the OECD guidelines are not legally binding. They are a part of the so-called soft law and are actively used by courts and tax authorities for interpreting law. They are also taken into consideration when making transfer pricing law (see Article 11j(2) and Article 11q(4) CIT Act) and they may determine whether a tax arrangement is reportable or not (see Article 86a(1)(13)(g) of the Tax Act).

The guidance on financial transactions will be incorporated into the OECD guidelines of 2017 by adding Chapter X and amending Section D.1.2.1 in Chapter I. The report comprises 5 main topics (sections):


  1. Section B – elaborates on guidelines included in Section D.1 of Chapter I of the OECD guidelines of 2017.
  2. Section C – treasury functions within groups of enterprises, in particular in the case of intra-group loans, guarantees, cash pooling structures and hedging.
  3. Section D – intra-group guarantees.
  4. Section E – intra-group (captive) insurance.
  5. Section F – guidance on how to determine a risk-free rate of return.

Below we elaborate on selected topics discussed in the new OECD guidance:

Difference between a loan and a capital contribution

Section B describes criteria which may help to delineate a transaction and to determine the cases when a loan should be regarded as a capital contribution – this may be particularly problematic in the case of hybrid loans (e.g. mezzanine financing). The criteria include without limitation: the presence or absence of a fixed repayment date, the existence of financial covenants and security; the ability of the recipient of the funds to obtain loans from unrelated lending institutions, the consequences of a delay and failure to repay the loan.

Determination of an arm’s length interest rate

Section C.1.1.2 deals with an assessment of creditworthiness of the borrower, including without limitation, an option to use a group credit rating instead of individual rating, use other financial tools and methodologies, as well as the effect of group membership (including incidental benefits) on the credit rating. Section C.1.2. additionally presents other guidelines helpful when setting an arm’s length interest rate.

Cash pooling

Section C.2. includes a description of circumstances which should be taken into account when determining the fee of the cash pool leader and the pool members. What deserves special attention is the statement that if the cash pool participants do not benefit from enhanced interest rate compared to that which they could benefit from in the case of transactions with independent enterprises, this does not mean that the transaction is not at arm’s length. That is because the cash pool participants may strive for other benefits from this transaction, such as access to a permanent source of financing; reduced exposure to external banks or access to liquidity that may not be available otherwise.

Intra-group guarantees

Section D deals with intra-group financial guarantees. When it comes to the evaluation of the impact of relations on the guarantor’s fee, the report says that it may be justified to waive the extra fee (commission) if there are very tight relations between the legal, economic and operational situation of the associated enterprises. Furthermore, the guidance describes 5 methods of calculation of guarantee fee and shows examples to prove that benefits to be obtained by the beneficiary under the guarantee should be assessed before determining the fee.

Intra-group (captive) insurance

Section E discusses determinants of an insurance business, as well as methods of determining a fee for intra-group insurance.

Risk-free rate of return

Section E includes guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return. Data on the rate of return of government issued securities are no longer the only reference when determining a risk-free rate of return – other methods include without limitation: the use of interbank rates, interest rate swap rates, repo rates, government issued securities.

By following the OECD guidance taxpayers limit the risk of tax authorities’ challenging the arm’s length nature of their prices. Therefore, we recommend reading them carefully – both to identify non-compliance between the OECD’s recommendations and the already completed financial transactions, as well as in the price calculation method and procedure.


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