2025 OECD Model Convention Updates on Transfer Pricing Aspects

The OECD Council approved the contents of the 2025 Update to the OECD Model tax Convention on Income and Capital (“OECD MTC”) on 18 November 2025. The most significant update relates t0 permanent establishments in the context of cross border home office arrangements (see our newsletter). In addition to that, it also covers other cross-border topics, including transfer pricing.

For transfer pricing aspects, the main changes relate to the commentary of the OECD MTC particularly Article 9 accompanied by commentaries on Article 7 and Article 25. The key areas covered include:

• • Profit adjustments and the role of the OECD Transfer Pricing Guidelines (“OECD TPG”)
  • Treatment of financial transactions
  • Deductibility of expenses
  • Rules on corresponding adjustments for financial transaction
  • Dispute resolution in light of Amount B

While it is not a topic specific for transfer pricing, the update also covers exchange of information, as outlined in the commentary on Article 26.

A brief overview of the main transfer pricing aspects is further outlined in the following sections.

OECD Transfer Pricing Guidelines as the interpretive standard on profit adjustments

The update explicitly embeds the OECD TPG as the interpretive reference for profit adjustments arising from related party transactions. Based on the commentary on Article 9, tax authorities may “rewrite the accounts” of associated enterprises only where the conditions of controlled transactions differ from those that would be agreed between independent parties, as interpreted under the OECD TPG.

The importance of accurate delineation of loans in intercompany financial transactions

Considering divergent country practices in applying Article 9 of the OECD MTC to determine the appropriate balance between debt and equity, the new commentary emphasizes that the accurate delineation of whether a transaction constitutes a loan for tax purposes must be addressed first, before determining the arm’s length interest rate. In practice, some jurisdictions apply the accurate delineation approach under the OECD TPG to determine whether an intercompany loan is, in substance, debt or equity, whereas others rely on domestic law rules (e.g. thin capitalisation or other specific interest limitation rules). Furthermore, the update also highlights that the application of domestic thin capitalisation rule does not, in itself, create economic double taxation and thus no obligation to make automatic corresponding adjustment.

No automatic obligation for corresponding adjustments due to the domestic interest limitation rules

The update clarifies that the application of a domestic thin capitalisation rule does not, in itself, create economic double taxation. Accordingly, there is no automatic obligation to grant a corresponding adjustment in such cases.

Deductibility of expenses

The update emphasizes that Article 9 does not deal with the issue of whether expenses are deductible when computing the taxable income of either enterprise, it is for the domestic law of each Contracting State to determine whether and how such expenses can be considered. In other words, the conditions for the deductibility of expenses are a matter to be determined by domestic law. Examples of domestic rules that can deny a deduction for expenses include certain rules on entertainment expenses, non-deductibility of management salaries and rules on interest expenses such as the fixed ratio and group ratio rules.

Amount B: dispute resolution mechanism for non-adopting countries

The update acknowledges Amount B as an integral part of the OECD TPG while respecting each jurisdiction’s discretion to decide its implementation, through the newly added commentary on Article 25. Most importantly, the update aims to preserve optionality in the dispute resolutions for jurisdictions that do not adopt the Amount B. The new commentary directly cross references the OECD Amount B report to resolve the disputes involving the baseline marketing and distribution activities. Accordingly, if any jurisdiction involved in a Mutual Agreement Procedure (MAP) opts out of the simplified and streamlined approach under the OECD Amount B, taxpayers, competent authorities and arbitrators must justify and resolve the case solely under the general provisions of the OECD TPG.

In terms of the corresponding adjustment, the non-adopting jurisdiction may still grant corresponding adjustments that mirror Amount B outcomes on a case by case basis or under competent authority agreements, provided the result is acceptable to that jurisdiction. Any such agreement should allow the granting jurisdiction to verify that the transaction qualifies for Amount B and confirm that Amount B has been correctly applied in determining the primary adjustment.

The broader application of exchange of information while maintaining the same confidentiality safeguards

The update also introduces changes to the rules on exchange of information. This includes that a receiving jurisdiction may use exchanged information in tax matters concerning other taxpayers beyond those initially in scope. It is not required to notify the sending state or to seek its prior authorisation before using the information in this context.

What this means going forward

The 2025 update to the OECD MTC strengthens the link between treaty interpretation and the OECD TPG. This confirms and reinforces the central role of the OECD TPG in providing guidance for intercompany cross border transactions, particularly on the financial transaction.

In light of these developments, taxpayers should place greater emphasis on the design and implementation of robust group intercompany financing policies. It is advisable to enhance contemporaneous documentation for intercompany financial transactions, with particular attention to the formal and economic classification of the transaction and to how arm’s length price is established.

Written by: Marianna Dozsa, Sandra Staudacher, Destiani Wardhani