On February 11, 2020, the Organisation for Economic Cooperation and Development (“OECD”) issued the final version of the Transfer Pricing Guidance on Financial Transactions (the “FT Guidance”).
Although tax and transfer pricing professionals had started to digest the implications of the Guidance and to implement relevant changes relating to financial arrangements, the momentum was very quickly interrupted by the onset of the COVID-19 virus and the resulting economic impact for many sectors within the global economy.
Currently, both Swiss and US multinational enterprises (“MNEs”) may need to take action to manage their liquidity and mitigate the impact of the current situation. In this context, the treasury activities and financial arrangements covered by the FT Guidance are of the uttermost importance for the effective execution of such mitigation and cash management strategies. However, in the current situation, MNEs should take into account the principles outlined in the latest FT Guidance in order to comply with the latest OECD requirements and thus provide support needed to minimise the costs of future audits.
In this article we highlight some important aspects associated with the new FT Guidance. The article broadly covers the following:
- Overview on the FT Guidance
- Accurate Delineation of the Transaction
- Treasury Functions: Intragroup Loans, Cash Pooling, and Hedging
- Risk-Free and Risk-Adjusted Rates of Return
- Practical Implications from US and Swiss Perspectives
- Thin Capitalisation Rules vs Arm’s Length Determination
- Safe Haven Interest Rates vs Arm’s Length Determination
- Covid-19 and the Immediate Impact on Financial Transactions
The latest FT Guidance represents a useful tool for taxpayers and will allow MNEs to review and improve transfer pricing policies in the context of financial transactions, as well as to upgrade transfer pricing documentation, and reinforce benchmarking analyses – all with the aim of avoiding lengthy transfer pricing audits in the future.
In light of the provisions of the Swiss/US DTA, in cases of disagreement between the US and Swiss tax authorities, the Guidance will be relevant for reaching agreement and avoiding double taxation. Therefore, both Swiss and US multinationals should take into account the latest FT Guidance.
For these purposes, also provided in this article is a checklist of points to consider when entering into intercompany financing arrangements.
Download the article to learn more about the New Guidance on Financial Transactions.
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