New TP Guidance Inspired By BEPS Action 8-10 Published In Budget Law 2017 On October 12, 2016

Background

Last Wednesday, 12 October 2016, the Luxembourg Minister of Finance presented the 2017 budget and the related draft bill to the parliament. Among social, environmental, and investment provisions, tax professionals and taxpayers spotted the tax section introducing a new set of rules for transfer pricing practice, in the form of the new Article 56 bis LITL with new guidance and clarification on transfer pricing regulations in Luxembourg.

After having introduced the basic principle of arm's length into Article 56 ITL based on Article 9 of the OECD Model Convention back in January 2015, this new article intends to add further guidance on how to practically apply this principle based on the latest version of Section D of Chapter I of the OECD Transfer Pricing Guidelines.

Purpose

In the Declaration of Intent, the government intends to incorporate some conclusions ("des conclusions tirées dans le cadre des actions BEPS 8-10") and basis criterions (des critères de base à respecter) drawn by the OECD under its BEPS initiative (action 8-10) into domestic law.

Highlights/what's new

The draft bill introduces a more granular functional and risk analysis based on the latest Transfer Pricing Guidelines for MNEs and Tax Authorities (hereafter OECD Guidelines) with a focus on the comparability analysis and the new tests as revised per the BEPS initiative to delineate controlled transactions.

Once the definitions are set in paragraph 1, it is worth mentioning that paragraph 2, 3, and 4 introduce commonly applied concepts of comparability analysis into the law. It therefore confirms that:

Should a related transaction not be observable between independent parties does not mean this transaction does not comply with the arm's length principle. Conditions between controlled transactions and transactions between third parties should be comparable, and economic characteristics should be comparable. When adjustments are required for comparability purposes, these should be reasonably reliable in order to eliminate the impact on the pricing. Taxpayers should identify the transactions and determine the economically significant characteristics and conditions in order to delineate the controlled transactions and then compare them to the open market. More practically speaking, it lists two key aspects for the comparability analysis:

Identify the commercial or financial relations between the associated enterprises and the conditions and economically relevant...