Emergence Of A New Era - How Will The Transfer Pricing Developments Impact Your Businesses?

Since the Luxembourg tax authorities (LTAs) issued guidelines on transfer pricing regarding the intercompany financing transactions in 2011, transfer pricing in Luxembourg has emerged a new era. Indicators include a recent court case that scrutinised the interest rates applied by a Luxembourg tax payer, and the coalition programme of the Luxembourg government announcing the introduction of new transfer pricing regulations. What's more, on a global level, the OECD is paying increasing attention to Based Erosion and Profit Shifting (BEPS).

A transfer price designates the price at which goods, services, intellectual property, or financing is transferred between related parties. The transfer price between related parties should be set as if the transaction took place between unrelated parties, i.e. at an arm's length price. In this respect, reference is made to article 9 of the OECD Model Convention and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which provide guidance on how to establish an arm's length price.

Here is an overview of the recent transfer pricing developments that may impact your business.

Towards more transparency

Transfer Pricing is on the radar of the BEPS Action Plan. One of the proposed measures relating to transfer pricing is Action Point 13. This will result in an OECD document on country-by-country reporting.

A proper transfer pricing study should comprise (i) a detailed description of all intercompany transactions, (ii) a functional analysis, (iii) the selection of the most appropriate transfer pricing methodology, and (iv) an economic analysis attesting that the transactions under review comply with the arm's length principle.

The proposal in question stipulates that transfer pricing studies have to provide a more detailed description of the intercompany flows, including information per country. Whereas this initiative aims at more transparency to assess the transfer pricing risk and perform a proper tax audit, it may lead to a higher compliance burden for tax payers, i.e. the preparation of transfer pricing documentation and higher risks of tax audits. A tax authority may argue, for instance, that it did not receive an appropriate profit in view of the profitability of the Multinationals (MNEs) in other countries.

While the OECD issues guidelines, it is up to the countries to adapt them to their own transfer pricing regulations.

Luxembourg transfer pricing circulars

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