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OECD Transfer Pricing Guidance

Pepeliaev Group advises that the OECD has released its Transfer Pricing Guidance on Financial Transactions[1].

One of the issues of determining the tax consequences of intra-group financial transactions (loans, security, etc.) is the extremely limited regulation of transfer pricing relating to such transactions.

Russian TP rules (section V.I of the Russian Tax Code) contain very few provisions which take account of the specific aspects of financial transactions. When the new Guidance was published on the OECD website, it was noted that this was the first time that the OECD Transfer Pricing Guidelines included guidance on the transfer pricing aspects of financial transactions.

The new Guidance has been developed as a follow-up to the BEPS project, in which the Russian Federation participates. It should be anticipated, therefore, that approaches set out in the Guidance will be also applied in the decisions of Russian courts and administrative authorities.[2]

The main issues addressed in the Guidance

Much attention was given to intra-group financing in the form of loans. The Guidance is relevant not only in determining whether the interest rate applied to the intra-group loan is an arm’s-length rate, but also how the financing received should be treated and how income from such financing should be allocated within the group based on the functions performed and risks assumed, etc.

According to the Guidance, it should first be analysed whether a transaction formalised as a loan contract is actually a loan transaction. Such an approach in the decisions of Russian courts and administrative authorities is known as “reclassifying a loan as a contribution to the equity capital”.[3] In this regard, the new Guidance proposes that the following criteria of lending relationships should be taken into consideration:

  • the presence or absence of a fixed repayment date; the obligation to pay interest; the right to enforce payment of principal and interest;
  • the status of the funder in comparison to regular corporate creditors; the existence of financial covenants and security;
  • the source of interest payments; the ability of the recipient of the funds to obtain loans from unrelated lending institutions;
  • the extent to which the advance is used to acquire capital assets;
  • and the failure of the purported debtor to repay on the due date or to seek a postponement.

In addition, the Guidance points to those typical actions that are performed when a decision is made either by a lender or a borrower regarding the grant of a loan (a risk analysis, defining the need for borrowed funds, determining the amount that can actually be repaid, an analysis of other sources of financing, etc.). These actions are beyond the functions and risks of the loan contract, as these are performed before the contract is concluded. If, based on TP documentation, or in fact, irrespective of the content of such TP documentation, actions typical of the lender are performed not by the lender but by its regional HQ in another state, the new Guidance can be used to substantiate that a double tax treaty with the country of such “nominal” lender should not be used. The amount of interest in this case can be divided into two parts:

  1. the part which corresponds to the actual function of the “nominal” lender. The provisions of the DTT between Russia and the country of the lender should be applied to it;
  2. and the remaining part to which a DTT between Russia and the country in which the above HQ is located should be applied in the best-case scenario. In the worst-case scenario, no benefits at all can be applied to this part.

If actions typical of a lender (determining the need, analysing the risk of default, searching for alternative financing sources, etc.) are not performed by the latter, the loan can be reclassified as a contribution to the equity capital, since financing which is actually made when the nominal lender does not perform such preliminary functions is typical of a contribution to equity capital rather than a loan. When a contribution is made to the equity capital this is decided by the shareholder at its own discretion and no approval by the recipient of such financing is required.

The Guidance provides a description of different useful financial functions which employees of one group company perform for the benefit of another group company (e.g. external treasury functions). In those cases, the Guidance is premised on the argument that based on an arm’s length rules, such activity of a foreign entity of the group should be paid by intra-group users. This can be used:

  • in the interests of taxpayers who pay for such activity anyway. They are now able to cite the Guidance as additional evidence to confirm a value set by the external functions;
  • against those who do not pay for such activity. In this case, a tax administration may cite the Guidance to substantiate recording as income the intra-group benefits that were received on a free-of-charge basis (see, for example: Resolution No.А40-44001/18 of the Ninth Commercial Court of Appeal dated 4 September 2019).

Moreover, the below intra-group financial transactions are given special consideration in the new Guidance:

  • cash pooling. It has been noted here, among other things, what approaches should be taken into account when financial benefits from cash pooling are distributed among its participants;
  • hedging;
  • guarantees and security instruments. Among other things, approaches proposed to be applied to determine the amount of remuneration under such transactions which should be an arm’s length remuneration are of interest here;
  • captive insurance.

The numerous examples which illustrate the potential options for how approaches set out in the new Guidance are applied in practice allow for a more exact assessment of the tax consequences of such approaches being applied towards specific cross-border financial transactions involving Russian entities.

What to think about and what to do

Russian members of multinational groups should compare the approaches laid down in the new Guidance and the way the tax consequences of intra-group financial transactions are determined at present. The new approaches should be also taken into account in future when intra-group financial transactions are structured.

Following the approaches set out in the new Guidance, it seems expedient to do as follows with respect to lending transactions:

  • carefully review the content of loan agreements, including from the perspective of provisions under which a lender controls a borrower’s financial standing, when the latter is obliged to report to the lender the forecast of financial flows, its financial standing and more;
  • review documentation drawn up to check compliance with TP rules in terms of a transaction's compliance with new rules;
  • identify the financial benefit that Russian companies of the group receive from abroad and take actions to mitigate the risk of such benefit being included in the non-sales income of such Russian companies;
  • prepare a defence file with respect to actions that are not reflected in contracts: compile correspondence between the borrower’s and the lender’s employees (rather than other companies of the group) regarding the loan amount, interest, maturity, available or emerging sources allowing for such conditions to be complied with by the borrower, and others; the actual fulfilment of provisions securing control by the lender (when the above forecast is sent to the lender rather than another group company).

Help from your adviser

Pepeliaev Group’s lawyers are ready to provide comprehensive legal assistance in view of the amendments to legislation, and to advise on all aspects of the new OECD Transfer Pricing Guidance on Financial Transactions. Specifically, we are ready to assist with checking financial transactions to discover non-compliance with the approaches set out in the new Guidance and to identify their consequences (risks) and possible actions that allow such risks to be mitigated or eliminated.

If a tax inspectorate has already conducted a similar “check”, we are ready to provide support in settling a dispute out of court and/or in court.



[1] OECD (2020), Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8-10, OECD, Paris

[2] For example, when defining the principles of and requirements for the procedure for confirming intra-group expenses set out in its Letter No.03-03-06/1/73272 dated 24 September 2019, the Russian Finance Ministry directly applies the OECD Transfer Pricing Guidelines.

[3] For example, the Russian Supreme Court’s Ruling No. 310-KG17-10276 dated 16 August 2017, No. 310-KG18-1849 dated 27 March 2018, and No. 310-ES19-3529 dated 8 September 2019.

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