Agreement reached on OECD transfer pricing guidelines for financial transactions, official says

By Julie Martin, MNE Tax

Countries working on new OECD transfer pricing guidelines for financial transactions have reached agreement on virtually all issues associated with the project, Thomas Balco, Head of the Transfer Pricing Unit at the OECD Centre for Tax Policy and Administration, said June 4.

Speaking in Washington at the 2019 OECD International Tax Conference, sponsored by the OECD, BIAC, and USCIB, Balco also provided an update on several other OECD transfer pricing projects, including the 2020 review of the country-by-country reporting scheme established in the 2015 OECD/G20 base erosion profit shifting (BEPS) plan agreements; a project to bring Brazilian transfer pricing closer to international tax norms; projects to update the OECD transfer pricing guidelines on dispute resolution and intragroup services; and improvements to transfer pricing rules to promote tax certainty.

OECD transfer pricing guidelines for financial transactions

Balco reported that working party 6 of the OECD Committee on Fiscal Affairs (WP6), responsible for transfer pricing technical work, has mostly resolved the 25 areas of disagreement identified in a July 2018 a nonconsensus discussion draft on transfer pricing guidelines for financial transactions.

A final key issue, concerning the extent to which an MNE group’s credit rating can be used for an individual group member, was resolved at WP6’s April meeting, Balco reported. As such, WP6’s technical work is complete, he said.

The work has not been published, though, Balco said, because WP6 is currently helping WP1 clarify the OECD Model Tax Convention’s commentary to Article 9 concerning an issue addressed in the new financial transactions transfer pricing guidelines.

Balco said that paragraphs 8–10 of the July 2018 financial transactions discussion draft sets out WP6’s compromise on the difficult issue of whether an arm’s length capital structure for companies should be recognized and, if so, whether domestic law provisions, such as deduction limits or rules deeming an instrument a prima facia loan, should take precedence when determining debt versus equity. The compromise acknowledged that Article 9 is relevant but confirmed that domestic law has priority, except to the extent the domestic provision discriminates, Balco said.

WP1 is working on language clarifying the commentary to Article 9 concerning whether Article 9 is overridden by domestic law, doctrine, or judicial decisions, and the BEPS action 4 EBITA fixed ratio, Balco said.

Balco said that the current model treaty commentary was based on a 1980’s report that addressed thin capitalization rules designed in a discriminatory way. The issue of discrimination needs to be updated and made clearer in the commentary, he said.

Balco said that once WP1 reaches consensus on the new commentary language, the OECD transfer pricing guidelines on financial transactions will be made public and shared as a final report. He said he hoped for publication before year-end.

Christopher J. Bello, US IRS Branch Chief, Office of Associate Chief Counsel (International), Branch 6, said that the new transfer pricing guidelines are a “good compromise.” He said that some countries believe that financial transactions are an area of widespread abuse that should be addressed in the same manner as hard-to-value intangibles, with presumptions and similar measures. He said compromises were reached in this area.

Countries also disagreed about the extent to which the transfer pricing guidelines should provide details about the debt versus equity distinction. Here, again, a compromise was reached. The draft does provide some discussion but does not act as a primer on whether an instrument is debt or not, he said.

Bello added that the new OECD guidance might be a good model for the IRS should the US decide to issue transfer pricing regulations on financial transactions.

Country-by-country reporting update

As contemplated in the 2015 BEPS agreements, work on a 2020 a review country-by-country reporting is underway, Balco said. WP6 and WP10 are reviewing the country-by-country reporting scheme jointly so that all Inclusive Framework members can participate in the process, he said.

The first objective is to agree on what issues should be included in a consultation document for public feedback. The goal is for the Inclusive Framework to agree to these issues at its January 2020 meeting. The consultation will be carried out during the first quarter of 2020. Approval of a final document by the Inclusive framework will be sought at the end of 2020. Any deadlock in the negotiations will mean that the country-by-country reporting scheme does not change, he said.

Balco said that country tax officials are saying that they do not yet have enough experience with country-by-country reporting to recommend any changes. Some countries are asking to revise the process so that countries can bring up issues about country-by-country reporting as they are discovered.

Balco said that among the issues that might be addressed is whether the revenue threshold for country-by-country reporting should be lowered and whether the content of the country-by-country report, the form of the report, or the filing mechanisms should change. 

Balco said that more than 80 inclusive framework members have introduced country-by-country reporting laws and 25 more have a draft law in place.

In 2016, 7,500 filings were made by either the ultimate parent of an MNE or a surrogate parent entity, he reported. Also, more than 2,000 bilateral exchange relationships have been established, 40 in the US alone.

He added that more work needs to be done to ensure that developing countries can obtain and exchange country-by-country reports.

Brazilian transfer pricing, chapter 4 & 7 update

Balco also reported that work is complete on a project to identify the similarities and differences between Brazilian transfer pricing and the OECD standards and what the effects are of those differences. The next step is to identify options for convergence as Brazil is seeking OECD membership.

A meeting will be held in Brazillia on July 11 where the OECD’s findings will be presented. Discussion will address the way forward, Balco said.

Further, he said that WP6 has completed issue scoping for an update to Chapter 4 of the OECD transfer pricing guidelines which deals with avoiding and resolving transfer pricing disputes.

For this project, WP6 will examine the usefulness of cooperative compliance, risk assessment, and examination practices. The project will also focus on corresponding and secondary transfer pricing adjustments and the risk of double taxation and advance pricing agreements, he said.

WP6 has also completed scoping work on Chapter 7, which concerns intragroup services, Balco said. WP6 was directed to update the language and the structure of the chapter to clarify areas that lead to misapplication and make the chapter consistent with other chapters of the OECD transfer pricing guidelines.

He said that transfer pricing work needed to advance the digital economy discussions would take priority over both Chapter 4 and Chapter 7 updates, though.

Also, to advance tax certainty, WP6 is considering what areas of the OECD transfer pricing guidelines give rise to the most disputes. The group is asking competent authorities and taxpayers to identify key areas of uncertainty in the transfer pricing guidelines to advance this work, he said.

Julie Martin

Julie Martin

Founder & Editor at MNE Tax

Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.

Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.

Julie can be reached at

Julie Martin
Julie can be reached at

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