The Luxembourg Parliament has approved a draft law, effective 1/1/2015, that will provide a formal transfer pricing framework, coupled with relevant transfer pricing documentation.
PwC’s newsletter provides a summary of these developments:
Summary of key points:
Alignment with the arm’s length principle as stated in the OECD Model Tax Convention, covering transactions between Luxembourg related parties or cross-border transactions.
Tax return report of upward, or downward, transfer pricing adjustments whenever the transfer prices do not reflect the arm’s length standard.
Transfer pricing documentation expectation for the three-tiered approach in accordance with the OECD’s final Chapter V guidelines.
APA’s: Competent Authority will seek advice for advance tax confirmations from a tax rulings commission for additional legal certainty. The tax confirmation rulings will be published in anonymous and summary form.
Luxembourg sends a strong statement of its alignment with the arm’s length principle and revised OECD transfer pricing documentation guidelines. Tax transparency of the APA ruling process and recognition of transfer pricing adjustments, upward or downward, also provide a revised state of play in this jurisdiction that performs a vital tax and economic role going forward for MNE’s and other tax administrations.
The 2014 Update, as adopted by the OECD Council on 15 July 2014, includes changes that were previously released for comments, including the meaning of “beneficial owner.” Numerous additions and deletions to Commentaries on various Articles, including positions of non-member countries, are also included. A link to the Update is provided for reference:
Article 5 Commentary: new views by Germany, Estonia, and Israel.
Article 9 Commentary: Hungary (newly added) and Slovenia reserve the right to specify that a correlative (i.e., offsetting) adjustment will be made only if they consider that the primary adjustment is satisfied.
The term “beneficial owner” does not have reference to any technical meaning under domestic law, thus it should not be used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and the prevention of fiscal evasion and avoidance.
The term “beneficial owner” does not deal with other cases of treaty shopping, which can be addressed in specific anti-abuse treaty provisions, general anti-abuse rules (GAAR), substance-over-form or economic substance approaches.
Article 13 Commentary: With respect to paragraph 3.1, Austria and Germany hold the view that when a new tax treaty enters into force, these countries cannot be deprived of the right to tax the capital appreciation which was generated in these countries before the date when the new treaty became applicable.
Article 26 Commentary: The Commentary was expanded to develop the interpretation of the standard of “foreseeable relevance” and the term “fishing expeditions,” i.e. speculative requests that have no apparent nexus to an open inquiry or investigation. The Commentary further provides for an optional default standard of time limits within which the information is required to be provided unless a different agreement has been made by the competent authorities. The examples provided are to demonstrate the overarching purpose of Article 26 not to restrict the scope of exchange of information but to allow information exchange “to the widest possible extent.”
The Update requires a comprehensive review to determine potential implications, including beneficial ownership restrictions and ways of working by competent authorities. Such review should distinguish changes to the Articles versus additions or deletions to the Commentary interpreting such Articles. Note that the OECD BEPS changes will be an addition to this Update.
Working Party No. 6 of the Organization for Economic Cooperation and Development (“OECD”) has prepared a Revised Discussion Draft on Intangibles, following an earlier Discussion Draft in June 2012. This revised Draft includes changes based upon comments received, including a public consultation, in 2012.
This Draft addresses, directly and indirectly, actions contained in the OECD Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”). Refer to my 19 July 2013 post for information on the OECD BEPS Action Plan.
The changes in the Draft include a new section addressing local market features, location savings, assembled workforce and group synergies, in addition to explanatory changes to the definition of intangibles. As stated in the Revised Discussion Draft, a transfer pricing intangible is not solely determined by its general tax or accounting characterization. The intangible definition is also mutually exclusive from the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention. Additionally, functions, assets and risks related to intangibles are determined via the functional analysis, and are not presumed to be held by the legal owner of the intangible.
The Draft includes an interesting discussion of the use of projected growth rates and discount rates, including examples in the Annex to illustrate the guidance on special considerations for intangibles.
Written comments may be submitted to the OECD on or before 1 October 2013. A public consultation will also be held on 12-13 November 2013 in Paris, France, selecting speakers from those providing written comments.
Analogous to my 31 July 2013 post for the OECD White Paper on Transfer Pricing Documentation, this Revised Discussion Draft should be reviewed and compared with the current methodology for intangibles, noting significant variations for internal analysis. Intangibles are a significant component of transfer pricing, thus this Draft should be seriously considered by all multinationals.