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Friday, 16 April 2021

The OECD’s Discussion draft on changing the Commentary on Article 9 (and others)

Article 9 of the OECD Model Tax Convention deals with the (distribution of) taxation (rights in respect) of transactions between associated enterprises. The OECD now proposes changes to the Commentary on Article 9 (and other related articles) to clarify its application, especially concerning its interaction with domestic laws on interest deductibility. The work is linked to the report Transfer Pricing Guidance on Financial Transactions that was published on 11 February 2020, the new chapter X of the OECD Transfer Pricing Guidelines (“OECD TGP”). The changes, which are put forward in a discussion draft (click here), are expected to be included in the next update to the OECD Model Tax Convention. Interested parties are invited to provide inputs on the discussion draft before 28 May 2021.

The suggested adjustments of paragraph 2 to the Commentary on Article 9 state that the arm’s length principle and the guidance of its interpretation of the OECD TPG should be followed in re-writing of accounts for the purpose of calculating tax liabilities of associated enterprises. Paragraph 1 of the commentary of Article 9 states that the OECD TPG represent internationally agreed principles. It should be noted that recently added content of the OECD TPG was not always confirmed through the approval levels that have been applied in the past. For example, for the newly introduced chapter on Financial Transactions, there was no real debate in public consultation for the (non-consensus) discussion draft (although the final report states that it considered written comments received whereas changes to the non-consensus draft were limited). Moreover, the content was integrated in the OECD TPG for the first time without explicit OECD Council approval. In our view, parts of the Financial Transaction chapter may indeed not represent a consensus view of all OECD Member States, which effectively is confirmed in the new chapter X of the OECD TPG, more in particular in paragraph 10.101. Therefore, where one should be cautious to the fact that countries may have a different view on the application of Article 9 on the assessment of the balance of debt and equity funding, we now wonder whether the update forces them to take a different stance, or, when feasible, express their position reserving their rights to stick to their different view. At least, at this point in time, it is unclear how different jurisdictions will react.

Whereas the current Commentary on Article 9 (in paragraph 3) includes references to domestic rules related to thin capitalization and whether a prima facie loan can be regarded as a loan or should be regarded as some other kind of payment, in particular a contribution to equity capital, the discussion draft includes a broader reference in this respect. It is included that a State, next to assessing the terms and conditions of the loan (such as the interest rate), may also need to examine, based on the facts and circumstances, whether a purported loan should be regarded as a loan or as another kind of transaction (in particular a contribution to equity capital). In this respect, in order to determine the extent to which the purported loan is regarded as a loan, the new Commentary states that it will do so taking into account factors discussed in its domestic laws (including judicial doctrine) “or” in the OECD TPG. Again, we reiterate our concerns regarding the different interpretations of chapter X of the OECD TPG that may occur, and feel another level of uncertainty is being added by introducing an optionality of two sources of law that are not necessarily each other’s equivalent.

Furthermore, paragraph 3.1. states that, once the profits of the enterprises have been allocated in accordance with the arm’s length principle, domestic law of each contracting state should determine how such profits are to be taxed, and states that Article 9 does not deal with the issue of whether expenses are deductible when computing the taxable income (subject to the provisions of the Convention).

The newly suggested paragraph 6.1 also states that any mismatch in this domestic law treatment does not in itself result in economic double taxation for the purposes of paragraph 2 and there is thus no obligation on State B to make a corresponding adjustment in these circumstances.

With respect to corresponding adjustments, paragraph 6 is adjusted in order to reflect that, if State A had increased the profits, state B is due to make an adjustment only to the extent that it considers that the figure of adjusted profits correctly reflects what the profits would have been if the transactions had been at arm’s length. The suggested adjustments merely further clarify the current wording. Moreover, a similar adjustment is suggested to the Commentary on Article 7 (i.e. Business Profits, paragraph 59).

Additionally, the discussion draft suggests to delete certain parts in paragraph 4 of the Commentary on Article 9 on procedural rules, such as the reversal of the burden of proof or presumptions of any kind, but rather suggests to include new wording to the Commentary on Article 24 (non-discrimination). More specifically, in paragraph 75, the reversal of the burden of proof is included as an example of the information requirement that can be made with respect to payments to non-residents.

Furthermore, paragraph 12.1 is added to the Commentary on Article 25 in order to confirm that OECD member States are admitting transfer pricing cases access to mutual agreement procedures.

Finally, although not mentioned, this public consultation document should be assessed in close relation with the OECD’s work on Pillar 2 – i.e. the GloBE (Global Anti-Base Erosion) blueprint, where the arm’s length principle in our view is at risk to be significantly undermined.

Tiberghien’s international tax team will analyze the discussion draft in further detail, make our comments available to the OECD, and continue to monitor these developments to assess the impact thereof on legal certainty for multinationals involved in intragroup funding relations. In case you have any further questions or want to further discuss implications, please do not hesitate to contact the authors.

Andy Neuteleers – Partner (

Ben Plessers – Senior Manager (

OECD TPG, paragraph 10.10: “Although countries may have different views on the application of Article 9 to determine the balance of debt and equity funding of an entity within an MNE group, the purpose of this section is to provide guidance for countries that use the accurate delineation under Chapter I to determine whether a purported loan should be regarded as a loan for tax purposes (or should be regarded as some other kind of payment, in particular a contribution to equity capital).

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