What Do The New Transfer Pricing Developments Mean For Asset Managers?

It seems that transfer pricing is the topic of the moment: in conferences, articles, and boardrooms you hear about it... but what does it really mean?

When third parties enter into commercial transactions with each other, the terms and conditions of their arrangement are governed by market forces and the price they negotiate is by definition a market price. However, this is not the case when two entities of the same group enter into similar commercial transactions. The negotiation is influenced by market forces, but also by the position of the entities within the group, by group synergies, and other biases that, all together, can lead to a price that is not at arm's length.

The purpose of transfer pricing rules is thus to ensure that the price of a transaction between two related parties corresponds to the price charged between independent parties involved in a similar transaction.

For tax authorities, the arm's length principle is important because their aim is to tax the profit that corresponds to the actual economic activities taking place in their respective jurisdictions, and to ensure that these profits are not shifted to a low-tax jurisdiction or from a profit-making company to a loss-making company of the same group.

Recent transfer pricing developments in Luxembourg

The latest transfer pricing news is related to the OECD's BEPS action plans. Part of these plans, which are being closely followed by tax authorities around the world, focuses on transfer pricing and more particularly on the alignment of profits with the value created through underlying economic activities or economic substance.

Two recent important transfer pricing developments show that the Luxembourg tax authorities (LTA) are no exception in how they're following the action plans:

The introduction of article 56bis (with effect from 1 January 2017), transposing into law the five comparability factors as established in the OECD guidelines, reinforces the existing Luxembourg transfer pricing practice with regards to transfer pricing analysis and documentation. As from FY2017, all taxpayers need to disclose, in their tax returns, if they are engaged in inter-company transactions. The LTA will accordingly have an immediate view of those taxpayers with potential transfer pricing concerns. Further to this measure, we expect an increase of transfer pricing documentation requests from the LTA, which has actually already begun in the asset management sector (see below)...