Information of the General Financial Directorate on transfer pricing in financial transactions
On 9 August 2021, the General Financial Directorate issued information on the guidance on transfer pricing in financial transactions (the “Information”) in which the General Financial Directorate refers to Transfer Pricing Guidance on Financial Transactions (the “Guidance”) published by the Organisation for Economic Cooperation and Development (the “OECD”) in February 2020. Together with the Information, the General Financial Directorate published an unofficial translation of the Guidance into Czech.
Although the General Financial Directorate issued the Information on the Guidance relatively late after its publication by the OECD (in February 2020), its publication confirms a long-term trend, namely that transfer pricing, both in general and especially in financial transactions, continues to be an important topic for the financial administration and the financial administration intends to continue to focus on it closely.
We discussed the OECD guidance on financial transactions in detail in the article Transfer Pricing Guidance on Financial Transactions.
As the General Financial Directorate notes right from the start, the Guidance represents an addition to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Guidelines”) as it is incorporated directly in the OECD Guidelines as a completely new Chapter X., which discusses financial transactions and partially amends the existing Chapter I. Given the scope of the Guidance, it is supposed to contribute to a uniform application of transfer pricing rules for financial transactions and thus prevent disputes arising in this matter.
The General Financial Directorate underlines the need for an exact definition of a specific financial transaction, including a review of contractual terms, functional and risk analysis, as well as taking into account the economic circumstances or business strategies used by the parties to the transaction.
In intragroup financing, the General Financial Directorate underlines the need to take into account both the creditor’s and the debtor’s perspective, which may not be fully aligned, and to the fact that when setting the interest rate in intragroup financing in the form of loans or borrowings, emphasis is placed on the use of the so-called rating (rating of the debtor/issuer and the credit rating of the issue), while the position of a particular debtor in the group and the implicit support resulting from it must also be considered. In cash-pooling, the General Financial Directorate points out that it is necessary to take into account the broader context of conditions of the cash-pooling and the “best possible alternative”. In financial guarantees and the area of captive insurance and reinsurance, the General Financial Directorate predominantly refers to appropriate methods for transfer pricing, but does not discuss other details.
Risk-free Rate of Return and Risk-adjusted Rate of Return
In conclusion, the General Financial Directorate comments on the use of the risk-free rate of return and risk-adjusted rate of return. According to the General Financial Directorate, it is appropriate to use the former in situations when the provider of funds lacks the ability to bear the risk or does not exercise decision-making functions to control the risk associated with investing in a financial asset, while the latter should be applied in situations when the provider exercises control over the financial risk associated with the provision of funds without assuming or exercising control over any other specific risk. Thus it is necessary to separate the financial risk borne by the fund provider in performing its financial activities from the operational risk borne by the funded party and associated with the use of these funds, e.g. in the development of intangible assets.
The issuance of the Information confirms the current trend of the tax administration that transfer pricing, including in the area of financial transactions, is one of the topics of tax audits.