Hedging is a strategy to hedge against the cost of changing exchange rates using appropriate financial instruments. A hedging transaction consists of a simultaneous conclusion of an opposite, opposite, unrealised transaction with an actual transaction.
Hedging can be used to hedge the risk of various investments, for example shares, bonds, currencies. Usually, the less stable the economy is, the higher the interest rates in a given economy will also be, which will involve a high cost of hedging, similarly in the case of economies with lower interest rates, the company will additionally gain on the hedged position. In view of the above, it is extremely important to maintain comparability of data when preparing the transfer pricing analysis.
Hedge transactions are subject to the obligation to prepare transfer pricing documentation, which means that at the same time taxpayers are required to disclose such transactions in TPR-C information in category 1205 (sale of other financial services – including payment services, hedging, factoring) or 2205 (purchase of other financial services – including payment services, hedging, factoring). The obligation to prepare transfer pricing documentation for hedging transactions will occur after the value of a controlled transaction exceeds PLN 10 000 000.00.
Hedge transactions are covered by the report “Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10”, which we have written here: https://www.ict.org.pl/oecd-publikuje-wytyczne-w-sprawie-cen-transferowych-dla-transakcji-finansowych/.
Section C.3. of the report indicates possible mechanisms by means of which the MNE group can centralize risk hedging, such as:
– transferring responsibility for hedging to the MNE group’s treasury unit
with hedging agreements concluded on behalf of relevant operating companies,
– transferring responsibility for hedging to the MNE Group’s treasury unit, whereby hedging agreements should be concluded in the name and on behalf of the respective operating companies,
– transfer of responsibility for hedging to the treasury unit of the MNE group together with the hedging contracts drawn up by and on behalf of another entity in the MNE group.
The guidelines therefore provide that the MNE group may centralise risk hedging in the treasury unit and that centralisation will contribute to improving the efficiency and effectiveness of the MNE group.
At the same time, the report indicates that if the hedges are executed on behalf of certain operating companies, the transfer pricing analysis should confirm the marketability of the transaction and profitability from the perspective of a given company participating in a hedging transaction.
On the other hand, if hedge transactions are executed on behalf of a treasury or other entity belonging to the MNE Group, the results of individual operating companies will not reflect the protection of relevant positions at the group level. The same would be the case if there were natural hedges within the multinational group but not within the entity that bears the risk associated with the hedging transaction.
The OECD therefore provides that the MNE group may centralise the risk hedging within the treasury unit and that centralisation will improve the efficiency and effectiveness of the MNE group.
Author: Beata Rawa – Transfer Pricing Manager