Intragroup transactions and the new OECD instruction for financial transactions
In connection with the issue of the instruction for transfer prices in financial transactions, which supplements the OECD Directive on transfer prices for multinational businesses and tax administrations (2017), we would like to draw attention to the fact that that one can expect the activity of tax administrators in the context of audit activity focused on transfer prices.
The instruction provides financial administrations and tax subjects general instructions as to how to proceed when assessing financial transactions. Emphasis is placed especially on substantiating the economic substance of financial transactions and attention is focused on their possible reclassification on the basis of facts (so-called “substance over form”). Intragroup credits/loans are among the primary areas of interest, and one should focus on the following:
- The first step in the context of assessing an intragroup credit or loan should lead to proof of whether the expense (interest) was spent on acquiring, securing or maintaining incomes.
- This should be followed by a consideration as to whether this is truly a credit/loan, or whether the transaction is characterized more as an intervention into the company capital structure (for instance – inordinate credit financing, which an independent person would not accept, could be viewed as an equity capital bonus).
- One should then verify whether the interest rate setting and conditions of the credit/loan corresponds to market conditions. Assessment of the debtor’s rating should also be a part of such an analysis.
The instruction at the same time draws attention to the fact that offers from external banks processed for the purposes of assessing transfer prices (thus without a real interest in utilizing such an offer from the client’s side) do not represent a real offer for the considered financing, which is why it cannot be used to fix the market interest rate.
In this regard, we recommend that clients assess whether their documentation for transfer prices concerning financial transaction corresponds to this new OECD instruction, in the same way as the provision Section 23 para. 7 Income Tax Act and its supplementary local regulations.