This content is from: Sponsored Content

Recent international transfer pricing developments in the financial services industry

Deloitte’s UK transfer pricing practice recently held a seminar for its clients in the financial services sector. As part of this event, representatives from Deloitte’s financial services transfer pricing practices provided updates on key events in their respective markets. Below is a summary of each of the presentations from the London event, by Bill Yohana of Deloitte in the US.

Australia – Geoff Gill, Deloitte Australia

Australia recently introduced a new transfer pricing law incorporating a requirement for arm'- length conditions (beyond price) and self-assessment of reconstruction.

This law is effective for taxpayers for income years commencing after 1 July 2013. The law also explicitly requires preparation of contemporaneous documentation to specific requirements for the taxpayer to obtain penalty reductions in the event of an ATO-initiated transfer pricing adjustment.

Recent announcements by the Australian government involve introduction of a new multinational anti-avoidance law (MAAL) that targets aggressive use of low-tax jurisdictions as booking locations for Australian customer sales. The measure targets both the business profits that could be attributable to a deemed Australian permanent establishment (PE) and the obligations arising under royalty and interest withholding tax.

Such business profits will be taxed at an effective tax rate that could be as high as 60%. In financial services, offshore booking of sales and trading revenue when the ultimate customer is in Australia therefore carries current and emerging tax risks. For a more in-depth discussion of the new law, see the related article in this issue.

Additional announcements by the government in the 2015-16 budget include early adoption of Action 13 of the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan regarding country-by-country reporting and master file/local file documentation requirements. These documentation requirements are expected to be effective for income years commencing after January 1 2016.

In the courts, the pending outcome of recent litigation is expected to be pivotal on many transfer pricing issues related to intragroup funding.

In terms of ATO activity relevant to the financial services sector, the following areas are receiving significant scrutiny:

  • Business restructures, including transfers of businesses, financial assets, or "books".
  • Marketing/origination activities, including particularly when trades are placed electronically
  • Offshore hubs, including marketing hubs in low-tax jurisdictions and service hubs in low-cost jurisdictions.

In addition, the ATO has challenged Inbound funding pricing and liquidity charges. More recently, ATO focus has also turned to understanding positions regarding outbound funding and liquidity charges.

The ATO's International Structuring and Profit Shifting (ISAPS) audit programme continues – many reviews have been completed, and many more are expected to be completed in 2015/16.

Belgium – Mourad Chatar, Deloitte Belgium

In 2006, the Belgian tax authorities set up a specific team dedicated to transfer pricing matters. Since its inception, the transfer pricing squad has grown significantly, from eight to around 30 full-time personnel focusing exclusively on transfer pricing audits. Today, the transfer pricing squad is composed of a mix of highly skilled senior transfer pricing professionals and relatively junior auditors. Although the transfer pricing squad has limited resources available, it has been very active and very efficient over the last years.

Since 2013, the TP squad has significantly changed the way in which audits are structured. First, the core team is now assisted on an ad-hoc basis by local tax inspectors. Further, a broad wave of transfer pricing audits is launched every year. Specifically, 250 questionnaires are sent each January to taxpayers selected for review. This selection is based on objective and consistent criteria, including whether the taxpayer is in a loss-making position, whether it has recently undergone a restructuring, and the like. The questionnaire aims to gather qualitative as well as quantitative information about the controlled entity. The transfer pricing squad seems to have adjusted in 2015 the initial standard questionnaire to focus on potential BEPS pressure points such as intragroup financial charges and captive insurance arrangements.

In terms of timing, taxpayers have an obligation to respond to information requests within one month. However, as collecting this information may be time- and resource-intensive, the transfer pricing squad generally grants extensions for reasonable reasons (such as force majeure). A pre-audit meeting may also be arranged with tax inspectors during which taxpayers, assisted by their tax advisers if necessary, have the opportunity to go over the scope of the audit.

Taxpayers may submit a ruling request to the tax authorities to secure their tax positions for five years on their operations in Belgium (permanent establishment status, transfer pricing, head office to branch capital allocation, etcetera). Requests to the Ruling Commission are free of charge, offering taxpayers an efficient and transparent process.

Taxpayers may request a pre-filing meeting before submitting their ruling request, which may be conducted on a no-name basis. During the pre-filing meeting, the Ruling Commission provides initial feedback and seeks clarification on certain points. This feedback will be useful to fine-tune the request before filing.

Belgium currently follows the OECD transfer pricing guidelines closely. Therefore, Belgium is also likely to follow, strictly, any OECD guidance issued under the BEPS initiative. In Belgium, soft law issued by the OECD and other bodies such as the EU Joint Transfer Pricing Forum (EU JTPF) are the main benchmarks for the Belgian tax authorities. Thus, Belgian circular letters providing guidance on transfer pricing matters refer to OECD and EU JTPF guidelines.

Canada – Muris Dujsic, Deloitte Canada

Officials from Canada's Department of Finance have confirmed the Canadian government's commitment to introducing any necessary legislative measures for the implementation of country-by-country reporting starting in 2016. However, because Canada is in a federal election year, there is some risk that the change will not happen when anticipated, as a legislative change will be required.

The Canada Revenue Agency (CRA) has recently increased its transfer pricing audit activity. Specifically, it has proposed and made adjustments in a number of cases and the overall transfer pricing environment has become very litigious.

Issues that attract particular scrutiny from the CRA include intercompany reinsurance, captive insurance, financial transactions, royalties, attribution of profits, and inbound intragroup services charges with a profit mark-up.

France – Gregoire De Vogue – Taj

The French taxation authorities recently published a list of 17 structures they consider to be abusive. This list notably includes aggressive transfer pricing, restructuring/business optimization, dividend or interest double-dip structures, and transactions they consider give rise to treaty abuse. Although this list does not prescribe any specific penalties, it is likely that those structures will be closely scrutinised during tax audits, and bad faith penalties of up to 40% may be applied, which would also prevent the taxpayer from benefiting from the opening of a competent authority procedure.

The taxation authorities also have extended the penalty regime for taxpayers that lack transfer pricing documentation (Article 1735 of the French Tax Code), so that taxpayers can be fined up to 0.5% of the amount of the non-documented transactions, meaning that a taxpayer can be penalised for a lack of documentation even if its transfer pricing policies are at arm's-length.

As a general observation, France is a strong advocate of the current BEPS initiative, and most of the BEPS final guidance will be quickly translated into domestic legislation. For instance, hybrids are already banned in France, and country-by-country reporting should be enacted by the end of 2015.

Ireland – Gerard Feeney, Deloitte Ireland

Ireland introduced a formal transfer pricing regime with effect from January 1, 2011. Companies that are trading in Ireland and subject to the 12.5% corporate tax rate are within the scope of Ireland's transfer pricing regime.

The key developments in Ireland over the last 12 months are the OECD's BEPS project and internal developments within the Irish Revenue regarding resources dealing with transfer pricing matters.

To assure international investors of Ireland's commitment to and focus on tax competitiveness, the Irish government in May 2014 announced a BEPS consultation process aimed at gathering views on how Ireland's tax system may need to change in response to the rapidly changing international tax landscape. The consultation process focused on three key elements: rate, regime, and reputation. The Irish government took on board the feedback provided by various groups and the BEPS discussion drafts released, and have outlined a roadmap on tax policy and measures to enhance Ireland's intellectual property regime and underpin the government's commitment to making Ireland a destination for successful global companies.

Over the last year, the Irish Revenue increased their internal resources to deal with transfer pricing matters, with a number of experienced hires from practice in the areas of competent authority and audits. The first transfer pricing audits are now taking place in Ireland.

Italy – Marco Mazzetti – Deloitte Italy

The transfer pricing landscape In Italy has been evolving in recent years in light of a significant number of transfer pricing audits. These audits, in turn, have led to several court cases, especially in the last two years. Most of these cases have affirmed the use of OECD principles, for instance on the importance of comparability factors, as well as on companies in a loss position that cannot be excluded without a functional analysis. Two Supreme Court decisions are particularly noteworthy, including one that applied the lender market principle in assessing whether an interest rate applied on intercompany loans is in line with arm's-length principle, and another one that considered an interest-free loan from an Italian parent company to a subsidiary not subject to the transfer pricing rules.

Moreover, it is worth mentioning the decree on international tax issues, which is still in draft form, and which includes several transfer pricing changes such as those to the black list regime, exit taxes and advance pricing agreements.

Finally, it is important to remember that, according to Italian regulation, transfer pricing documentation for branches consists of not only the country file but may also include the master file, depending on the qualification of the head office of the branch.

Germany – Christian Jacob, Deloitte Germany

Global measures in response to the OECD's BEPS initiative also have an impact on the regulatory framework in Germany, in particular for the financial services industry. The German government supports the BEPS initiative, particularly Action 7 (Prevent the artificial avoidance of PE status) and Action 8 (Intangibles), both of which are expected to have an impact on the transfer pricing rules for the financial services industry in Germany.

Regarding German laws, regulations, and case law, the following three developments should be highlighted:

First, in 2014, Germany implemented the Authorised OECD Approach (AOA) in domestic law (Sec. 1 para. 5 Foreign Tax Act (FTA)), followed by the introduction of the decree-law on the profit allocation to permanent establishments (BsGaV), which substantiates the AOA and provides detailed rules especially for banking and insurance companies. Germany generally follows the guidance provided by the 2010 OECD Attribution of Profits to Permanent Establishments Report. However, for some fact patterns, the decree-law provides more detailed rules than discussed by the OECD, and reduces the range of alternative approaches available to the taxpayer. This is especially true for branch capital allocation methods and – deviating from the standards set by the OECD – the refutable presumptions set forth in the decree-law, for example, regarding the concept of the "general representative" in the context of insurance.

Second, the German tax authorities are paying increasing attention to business restructurings and the transfer of functions, including in the financial services industry. This is related to the concept of the hypothetical arm's-length test, which has been introduced by the amendment of the FTA as of January 1 2008 and the decree-law on the relocation of business functions (FVerlV).

Finally, with its judgment in the case Verder LabTec GmbH & Co. KG (Case C -657/13; judgment dated May 21, 2015) the European Court of Justice has confirmed that Germany's exit taxation regime complies with EU law. This judgment also clarifies that the adjustment rules based on the AOA, which explicitly allow an adjustment item in the balance sheet (see Sec. 1 para. 5 FTA, in conjunction with Sec. 16 para. 1 no. 1 and para. 2 BsGaV) does not violate EU law.

Netherlands – Pim Gerritsen van der Hoop, Deloitte Netherlands

The Dutch state secretary of finance on June 12, 2014, published decrees updating and replacing, among others, previous guidance on the substance requirements for holding companies and intragroup financing, licensing, and leasing companies. The decrees provide guidance and clarifications by the Ministry of Finance regarding its views on the minimum substance required for intragroup financing, licensing, and leasing companies to successfully claim application of the Dutch treaty network or the EU Interest and Royalty Directive, and to claim withholding tax credits.

In February 2015, the remuneration legislation for companies in the financial services sector (known as Wbfo) officially entered into force. In addition to a 20% bonus cap, whereby variable remuneration cannot account for more than 20% of fixed remuneration, the Wbfo introduces a broad set of rules to ensure that financial services companies carry out a sound remuneration policy and avoid payment of excessive variable remuneration.

New Zealand – Bart de Gouw, Deloitte New Zealand

Although there have been few development in New Zealand transfer pricing legislation and limited publication by the New Zealand Inland Revenue regarding transfer pricing in the financial services sector, the Inland Revenue supports the OECD's BEPS initiative, with New Zealand following the OECD transfer pricing guidelines closely. Any OECD guidance issued as a result of the BEPS initiative will have an impact on the development of New Zealand domestic legislation and practice going forward.

Despite the lack of formal changes to the New Zealand transfer pricing compliance landscape, Inland Revenue has intensified its transfer pricing review and audit activities in the past 12–18 months, and is recruiting additional resources to assist with this initiative. The following observations apply to clients operating in New Zealand in the financial services industry.

The Inland Revenue has demonstrated an increased focus on debt pricing, particularly since the change in its "small value loan guidance" in 2014, which raised the threshold to NZD 10 million ($6.6 million) and thus increased its focus on loans in excess of this amount. Inland Revenue now has a dedicated debt pricing team, which comprises approximately 50% of its entire transfer pricing team, scrutinising these arrangements in detail.

The Inland Revenue's 2015-2016 tax policy work programme includes continued work on the BEPS initiative, with particular mention of hybrid instruments and entities in light of the OECD's recommendations. Inland Revenue has been successful in challenging a number of hybrid instruments in recent years, and the use of these instruments in New Zealand has declined significantly.

Annual basic compliance package (BCP) reviews have become more frequent since their introduction in 2013, with most taxpayers with turnover in excess of NZD 80 million being required to complete an annual BCP information package (of which transfer pricing and financing risk assessment questionnaires are a large part) and attend an interview with the Inland Revenue.

In addition to the BCP process, the Inland Revenue released in June 2015 an International Questionnaire for large multinationals that is designed to collect key information about financing/debt, transfer pricing, and tax management policy matters to assist the tax authorities to measure the impact of BEPS on New Zealand. The questionnaire is a further risk assessment process that supplements the existing BCP and Compliance Management processes already in place; it is expected to feed into key policy decisions for New Zealand as countries move toward implementation measures arising from the BEPS Action Plan.

United Kingdom – Peter Johns, Deloitte UK

Transfer pricing has been a particularly hot topic in the UK over the last 12 to 18 months, with increased public interest in the area encouraged by the Public Accounts Committee hearings during late 2013/early 2014, which attracted significant media attention and led to an upscaling in HMRC's transfer pricing resources, a development that has already translated into more inquiries within certain sectors, including insurance.

The UK is an enthusiastic participant in the OECD's BEPS programme and has committed to early adoption of the country-by-country reporting requirements recommended by the OECD in Action 13 (Transfer Pricing Documentation) releases. A significant domestic law development has been the introduction of the diverted profits tax legislation effective April 1 2015, which involves the application of a penal tax rate of 25% to profits viewed as being diverted away from the UK, either as a result of transactions lacking economic substance or the avoidance of a UK PE. This is closely connected with the BEPS programme, in that the stated intention of this legislation is to encourage multinational groups to adjust their UK tax position in line with the government's expected outcomes from BEPS.

Bill Yohana

Deloitte Tax LLP

1633 Broadway
New York, NY 10019
Tel: +1 212 436 5578

Relevant experience

Bill is a director in Deloitte's transfer pricing practice in New York City. Bill has been providing clients with transfer pricing advice for the past 17 years, with a focus on addressing financial services transfer pricing issues as an adviser to commercial and investment banks, asset managers, finance companies and insurers. He also has extensive experience in financial transactions transfer pricing issues across industries, including the pricing of related-party loans, credit guarantees, the development of global loan and guarantee pricing policies and the evaluation of capital structure and thin capitalisation issues.

Bill also has considerable experience in tax controversy matters arising from financial transactions, including responding to taxation authority position papers and creating strategies in taxation authority audits. Bill has worked with clients in the energy sector, particularly in relation to the funding of their businesses, the establishment of commercially realistic capital structures and developing models for cross-border energy trading.

Before beginning work in transfer pricing, Bill worked for four years in US and international equity investment management and for four years in interest rate derivative structuring. He also worked at the Federal Reserve, where he held a payment system policy role.


  • Cornell University, Johnson School of Management, Masters of Business Administration
  • The University of Chicago, Bachelor of Arts, Economics
  • The University of Oxford, Jesus College, Visiting Student in Philosophy and Economics


  • Chartered Financial Analyst, CFA Institute

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms and Conditions and Privacy Policy before using the site. All material subject to strictly enforced copyright laws.

© 2021 Euromoney Institutional Investor PLC. For help please see our FAQ.

Instant access to all of our content. Membership Options | 30 Day Trial