On April 8, 2019, the UN Committee of Experts on International Cooperation in Tax Matters (the “Committee”) issued draft updates to the existing Practical Manual on Transfer Pricing for Developing Countries (the “Manual”), which included a new chapter on Financial Transactions and revised texts on Profit Splits as well as Establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits. This release coincided with the 18th session of the Committee held at the UN headquarters on April 23-26, 2019.
The proposed new Chapter B on Financial Transactions is largely a discussion document reflecting the current thinking of the Subcommittee Article 9 (Associated Enterprises): Transfer Pricing with respect to this topic. It opens with a discussion on the importance of intra-group financing transactions within multinational groups and how these transactions may lead to base erosion. Thereafter, the chapter focuses primarily on loans and guarantees for non-financial companies and is organized into the following sections:
- Common types of intragroup financial transactions and of group financing departments;
- The process of actual delineation and relevant characteristics of financial transactions;
- The process and system of credit rating;
- Potential transfer pricing methods, including the use of simplification measures/safe harbours;
- Different types of intra group loans and relevant characteristics;
- Determining the arm’s length nature of intra-group loans;
- Different types of intra group financial guarantees and relevant characteristics; and
- Determining the arm’s length nature of intra-group financial guarantees and available methods.
As mandated, the proposed new chapter clearly “draws upon the work being done in other forums”; most apparently the OECD’s Public Discussion Draft on Financial Transactions, which was released for public comment in the summer of 2018. While the UN’s proposed chapter does not take strong positions in opposition to current transfer pricing orthodoxy, it does have some nuanced differences. It also provides a narrative that delves into certain subjects such as comparable transactions in a level of detail (and with examples) that many practitioners and taxpayers will find helpful.
Like the OECD’s draft, the UN’s proposed chapter is not yet representative of consensus across the 27 Subcommittee members and it is pending additional review. According to the Committee’s note, the Subcommittee on Article 9 (Associated Enterprises): Transfer Pricing is expected to provide its final draft for discussion and adoption no later than 2021, but preferably in 2020. It is Duff & Phelps’ understanding that the OECD’s draft is also in the process of being finalized and will likely be made available this year. A link to the UN draft is available here.