March Tax Alert


OECD guidance on financial transactions finalised 

Tax Alert - March 2020

By Bart de Gouw and Graeme Fotheringham 


On 11 February 2020 the OECD released its final Transfer Pricing Guidance on
financial transactions (“OECD Guidance”) as a follow up to Base Erosion and
Profit Shifting (BEPS) Actions 8-10. The Guidance aims to clarify the
application of the transfer pricing guidelines to financial transactions. The OECD
Guidance takes into account the comments received in response to the public
discussion draft released in July 2018 and covers the following topics:

  • The accurate delineation of financial transactions and treasury functions;
  • Pricing of related party loans, cash pooling and hedging;
  • Pricing of financial guarantees;
  • Captive insurance; and
  • Considerations with respect to determining risk-free and risk-adjusted rates of return.

A more substantive summary of the OECD Guidance by Deloitte Global can be found here. 

Deloitte Comments

Accurate delineation – debt/equity determination

The Income Tax Act 2007 requires taxpayers to apply domestic transfer pricing rules consistently with OECD transfer pricing guidelines, which now includes the OECD Guidance on financial transactions. The new OECD Guidance emphasises an approach of accurately delineating the actual transaction to determine the capital structure (debt versus equity determinations), the particular terms of the financial transaction, or the lender’s capacity to make decisions or control risk.

Based on a number of economically relevant factors detailed in the report, taxpayers may be required to assess whether independent parties would have agreed to the particular terms of the tested transaction.

One of the key considerations is whether a transaction should be treated as debt or equity. In effect taxpayers are required to accurately delineate any existing or proposed financing transactions before considering interest deductibility issues under thin capitalisation and restricted transfer pricing rules. The guidance includes a number of examples including scenarios where a long-term related party loan may be more accurately delineated as a series of refreshed short-term loans or where the related party loan should be better considered as an equity contribution from the shareholder.  This provides another avenue for Inland Revenue to potentially challenge the interest deductions on related party borrowing of New Zealand companies.

On the flipside, the guidance may also provide opportunities for New Zealand taxpayers to consider whether any funds advanced to offshore subsidiaries should be more accurately delineated as an equity contribution rather than debt such that no interest need be charged for transfer pricing purposes.  A careful analysis of the facts will be needed.

Pricing of Intragroup loans

The OECD Guidance also provides commentary on different approaches to
determining an arm’s length interest rate on intragroup loans. A number of
factors could be considered in determining an arm’s length rate including:

  • Lender and borrower’s perspectives;
  • Borrower’s credit rating and credit rating of a specific debt issuance;
  • Effects of group membership and implicit support
  • Guarantees; and
  • Loan fees and charges.

It is clear that some of the principles discussed in the OECD Guidance do not necessarily align with some of the recent BEPS measures that have been introduced in New Zealand. For example, the commentary takes the view
that a facts and circumstances driven approach should be taken to determine
whether the borrower should be aligned to the group’s credit rating.

In comparison the restricted transfer pricing rules can require high BEPS risk borrowers to have a credit rating one notch below the credit rating of the member of the worldwide group with the highest unsecured third party debt (or two notches where the resulting credit rating for the New Zealand-resident borrower will be BBB- or higher), regardless of that borrower’s actual credit rating.

The guidance therefore serves to highlight the divergence between New Zealand’s approach to pricing debt under RTP and the OECD principles used by other member states.

Guarantee Fees

We are presented with some useful approaches to accurately delineating and pricing guarantee fees. The OECD Guidance makes a distinction between explicit and implicit guarantees and requires consideration of both the benefit to the guaranteed party and the risks to the guarantor. Where the effect of a guarantee is to permit a borrower to borrow a greater amount of debt than it could in the absence of the guarantee, borrowers may consider whether this additional amount could be accurately delineated as an equity contribution from the guarantor to the borrower. 


Final word

Inland Revenue will take comfort from the fact that the OECD Guidance does not preclude jurisdictions from implementing other approaches (such as the restricted transfer pricing rules) to address capital structure and interest
deductibility.  However, in our view, this does not extend to a green light to ignore OECD principles when pricing the debt.  What is clear from the guidance is that recent BEPS changes to New Zealand’s domestic rules do not fully align
with OECD principles and may cause unexpected outcomes and risk of double

Inland Revenue continues to maintain that existing New Zealand legislation is
consistent with OECD principles and have noted that taxpayers may use the
Mutual Agreement Procedure to address any issues caused by any divergence in the OECD and New Zealand positions.  In practice these procedures can be difficult and costly to apply.

If you have any questions or concerns regarding the OECD Guidance and how these might apply to your existing financing transactions we recommend you contact one of the authors or your usual Deloitte tax advisor to discuss further. 

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