Transfer Pricing Implications of Action 4 under the OECD’s BEPS Initiative

The OECD’s BEPS Action 4 shall prevent multinationals from using interest deductions and other financial payments to artificially avoid or reduce taxation. This article analyses the main implications of the suggested approach, in particular its relation to the well-established arm’s length principle, potential side effects distorting business incentives and its actual impact on multinationals under different scenarios. The authors conclude that the proposed combination of the fixed and the group ratio rule marks a clear break with prevailing transfer pricing standards and will indeed affect the business of a number of multinationals around the globe.