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Latest developments in financial transactions transfer pricing: The Swiss view

The concept of the arm's-length principle is not new but the breadth of its interpretation today has changed considerably since it was first officially set out in Article 9 (Taxation on Income: Associated Enterprises) of the OECD's 1998 Model Tax Convention on Income and on Capital.

Views on the interpretation of the arm's-length principle differ across various countries and organisations and this is indeed also the case for issues relating to financial transactions.

The latest 2017 OECD Transfer Pricing Guidelines extensively elaborate on transactions relating to goods and services, intangible property and business restructurings, but the OECD is yet to publish its final guidance on financing transactions (originally anticipated in the summer of 2017). As things stand, the new OECD Guidelines provided some helpful insights on financial transactions, but to a large extent the guidance arguably raises more questions than it answers and leaves much open to interpretation.

Nevertheless, some common themes are emerging, with a strengthening focus on substance and risk. This focus extends further to encompass options realistically available, actual ability to control and bear risk, and arm's length behaviour of transacting parties notwithstanding the contractual terms of the transaction.

Practical considerations

In light of the above, it is important to consider the latest concepts impacting transfer pricing of financial transactions. We briefly outline these below.

Implicit support (or passive association)

The concept of passive association has been around for many years but the explicit acknowledgement of this concept within the latest OECD Guidelines removes substantial doubt around the application of this concept and illustrates that implicit support should be taken into account when determining the creditworthiness of a borrower.

The nuances surrounding the exact level of implicit support and the impact that this might have on credit ratings can be complex and require a revamp of numerous transfer pricing methodologies that have been used by multinationals in the recent past.

Substance light entities (cash boxes)

Substance light entities have been the focus of the OECD initiative on many different fronts, and substance light lenders have fallen in with the rest. As such, a lack of functionality and control over financial risk by the lender could theoretically result in a reallocation of the associated financial return.

The concepts of risk free return and risk adjusted return that were put forward by the OECD leave a lot up to interpretation, but the key theme regarding substance light entities remains clear and is already having a substantial impact on typical financing structures.

Accurate delineation of transactions

The actual behaviour of parties to a transaction has long been the focus of tax authorities. However, the explicit references made to this concept within the new OECD Guidelines could have a material impact on financial transactions. An extended application of this principle could substantially impact the arm's-length terms of various financing arrangements, covering a broad range of considerations.

The way forward

Despite varying economic views and expertise in these areas we all humbly await the new OECD guidance on financial transactions, in the hope that this will provide a global consensus and bridge the disconnect between the approaches of various tax authorities.


Christian Jacob ( and George Galumov (
Tel: +41 58 279 6391 and +41 58 279 8142

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