Global Transfer Pricing ConferenceFinancial transactions – the centre of attention

October 2016

www.pwc.com/transferpricing

The new normal – full TransParency

Global Transfer Pricing Conference │ October 2016

Today’s presenters

PwC │ 2

Jeff Rogers Canada

Krishnan Chandrasekhar US

Nick Houseman Australia

Andy Paton Canada

Marc RaschLuxembourg

Global Transfer Pricing Conference │ October 2016

Agenda

PwC │ 3

BEPS and financial transactions 1

Status of OECD guidance on pricing financial transactions 2

Section 385 regulations4

Practical guidance 5

Global Transfer Pricing Conference │ October 2016

Substance and value attributed to treasury centres

3

Global Transfer Pricing Conference │ October 2016

In-session Q&A

PwC │ 4

To submit questions electronically, select the current session from the agenda (on the main menu), and tap on Participate and Q&A.

Global Transfer Pricing Conference │ October 2016

In-session polling

When requested, select the current session from the Agenda (main menu), tap on Participate and Polling.

PwC │ 5

Global Transfer Pricing Conference │ October 2016

BEPS and financial transactions

PwC │ 6

Actions 2, 4, 8-10 and 13

• Action 2. Proposals to neutralise the effect of hybrid mismatch arrangements by providing recommendations for changes to domestic law and the OECD Model Tax Convention.

• Action 4: Proposals to limit base erosion involving interest deductions and other financial payments.

– Recommended approach is a fixed ratio rule limiting net deductions for interest payments to a percentage of an entity’s EBITDA.

– Proposal also includes a group ratio rule alongside the fixed ratio rule which would allow an entity with net interest expense above a country’s fixed ratio rule to deduct interest up to the level of the net interest/EBITDA ratio of its worldwide group.

Global Transfer Pricing Conference │ October 2016

BEPS and financial transactions

PwC │ 7

Actions 2, 4, 8-10 and 13

• Actions 8-10: Aligning transfer pricing outcomes with value creation

• Action 13: Transfer pricing documentation and country-by-country reporting

– Increased transfer pricing documentation requirements will require taxpayers to provide details on the role of treasury and potential highlight the value attributed to the treasury function if the treasury function is the only function performed in a country.

Global Transfer Pricing Conference │ October 2016

Status of OECD guidance on pricing financial transactions

PwC │ 8

• Action 4 noted that In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and capital and other insurance arrangements. The work will be co-ordinated with the work on hybrids and CFC rules.

• Initial meetings occurred in Paris in early 2016.

Global Transfer Pricing Conference │ October 2016

Substance and value attributed to treasury centres

PwC │ 9

• The substance and value attributed to treasury centres will potentially become an increasingly important issue in light of the OECD’s proposal to align transfer pricing outcomes with value creation.

• Important to consider the functions performed by treasury centres with respect to both the creation and management of financial instruments.

Impact of BEPS actions 8-10

Global Transfer Pricing Conference │ October 2016

Polling question 1

A. No

B. Yes, and no further work is planned

C. Yes, but we are waiting for specific local

country guidance

D. Yes, we are actively reviewing the

potential impact of the proposals and

alternative policies

Since the OECD BEPS papers were

published in October 2015 has your

group’s financial transactions TP

policy been revisited by tax?

PwC │ 10

Global Transfer Pricing Conference │ October 2016

Polling question 2

PwC │ 11

A. No

B. Yes, treasury and legal have asked questions

C. Yes, it has reached the C-suite

D. Yes, both B and D

Have non-tax stakeholders become

more interested in intercompany

financing since the release of the BEPS

papers

Global Transfer Pricing Conference │ October 2016

The US 385 regs

PwC │ 12

• Documentation: Treas. Reg §1.385-2 maintains the requirements in the proposed regs requiring (i) enforceable legal documentation, (ii) standard creditor rights, (iii) demonstration of ability to repay, and (iv) ongoing maintenance and controls.

• Scope: Apply only to debt issued by U.S. corporations. Debts issued by S corps, non-controlled REITs and RICs, and controlled partnerships generally excluded.

• Factors for debt capacity: Modified weighting of certain factors for the common law determination of whether an instrument constitutes indebtedness or equity.

Global Transfer Pricing Conference │ October 2016

The US 385 regs

PwC │ 13

• Effective date: Effective date of documentation rules deferred to Jan 1, 2018. Documentation must be available as of the date of the tax return filing.

• Consequence of non compliance: Rebuttable presumption, rather than per se recharacterisation as stock applies in the event of documentation failure.

• Cash pools: No general exception from the documentation requirements for cash pools, but the exception for debts issued by foreign corporations will, as a practical matter, effectively exempt offshore cash pooling operations of U.S. based multinationals.

Global Transfer Pricing Conference │ October 2016

Polling question 3

PwC │ 14

A. No

B. Yes, treasury and legal have asked questions

C. Yes, it has reached the C-suite

D. Yes, both B and D

Have non-tax stakeholders become

more interested in the transfer pricing of

loans to US entities since the release of

the 385 regs?

Global Transfer Pricing Conference │ October 2016

Panel Q&A

PwC │ 15

Global Transfer Pricing Conference │ October 2016

Taking action

Consider the potential impact

Action 4 could have on your ETR.

Determine the place of treasury in the

value chain.

Develop a practical and robust global TP

policy for financial transactions.

Consider changes to local transfer pricing rules or tax authority

practices.

PwC │ 16

Global Transfer Pricing Conference │ October 2016

What did you think?

PwC │ 17

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