On January 20, 2022, the OECD released the latest version of its OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The 2022 Transfer Pricing Guidelines update the 2017 edition by incorporating guidance released by the OECD over the past few years on the transactional profit split method, hard-to-value intangibles, and financial transactions. Although there is no completely new guidance in the 2022 Transfer Pricing Guidelines, some of the previously released guidance now formally incorporated in the Guidelines is quite significant. This includes new Chapter X on financial transactions, which among other guidance incorporates proposed and controversial changes to the Commentary on Article 9 of the OECD Model Tax Convention.
Despite the pressure that the arm’s length principle has been under in recent years, the 2022 Transfer Pricing Guidelines reaffirm that the arm’s length principle is the international standard as set forth in paragraph 1 of Article 9 of the OECD Model Tax Convention. The 2022 Transfer Pricing Guidelines further confirm that the arm’s length principle works in the vast majority of cases, but is challenging to apply in highly specialized goods, unique intangibles, and specialized services. Similarly, the 2022 Transfer Pricing Guidelines continue to acknowledge that comparable uncontrolled transactions should be used to analyze controlled transactions (the comparability analysis), but that difficulties may arise in getting the information necessary to perform a comparability analysis. Notwithstanding that some have commented that the reallocation of taxing rights under Pillar One is a move towards global formulary apportionment, the 2022 Transfer Pricing Guidelines continue to reject that idea: “Global formulary apportionment would not be acceptable in theory, implementation, or practice.” (¶1.15) Moreover, even as the implementation rules for Pillar One take shape, the OECD Guidelines will continue to be relevant in determining profit attributable to marketing and distribution as well as Amount B (see our alert on this topic).
Chapter X of the 2022 Transfer Pricing Guidelines incorporates the new guidance released in February 2020 on financial transactions.[i] Of note, however, is footnote 1, which provides that the guidance in the subsection on whether a “purported” loan should be regarded as a loan is consistent with both the Commentary on Article 9 of the 2017 OECD Model Tax Convention and “also with the Commentary as it would read with proposed changes that have been agreed by Working Party No. 1.” On February 11, 2020, Working Party No. 1 proposed significant changes to the text of paragraph 3.0 and a new paragraph 3.1 in the Commentary on Article 9. Specifically, paragraph 3.1 provides that “[t]he conditions for the deductibility of expenses are a matter to be determined by domestic law….” In March 2021, the OECD invited public comments on the proposed changes. Comments, in large part, focused on the OECD’s deference to domestic law and the denial of access to Mutual Agreement Procedures under Article 25 for double tax relief. It remains to be seen whether or how the OECD will address these comments in the next update to the OECD Model Tax Convention, but for now, the 2022 Transfer Pricing Guidelines have incorporated the proposed changes to paragraph 3.0 and new paragraph 3.1 into its guidance on financial transactions.
[i] Several prior blog posts by Scott Stewart have examined the OECD’s February 2020 guidance on financial transactions in detail, including the guidance on Accurate Delineation of Financial Transactions, Intra-Group Loans, Financial Guarantees, Cash Pooling and Captive Insurance.