by Dr. Paloma Schwarz Martínez
Luxembourg’s government has submitted a draft bill to Parliament to introduce into law some of the key principles set out in the OECD Transfer Pricing Guidelines as rewritten in the framework of the OECD/G20 base erosion profit shifting (BEPS) project.
Draft Budget Bill n°7050, submitted October 12, introduces a new Art. 56bis into the Luxembourg Income Tax Act (LITA), which would enter into force from fiscal year 2017.
As of 1 January 2015, Luxembourg’s transfer pricing regime has been based on Art. 56 LITA, which relies on the arm’s length principle contained in Art. 9 of the OECD Model Tax Convention. By introducing a new Art. 56bis LITA, the Luxembourg government intends to go one step further by formally incorporating the new recommendations stemming from the BEPS project into Luxembourg Law.
In particular, the new Art. 56bis LITA would implement the comparability analysis into the Luxembourg corporate tax system, including the new rigorous six-step approach to risk analysis, following the wording of paragraph 1.33 of the post-BEPS transfer pricing rules.
Article 56bis LITA also sets out the economically relevant characteristics or comparability factors that need to be looked at when “accurately delineating” a controlled transaction, namely, in concreto functions, risk, and contractual terms, by largely replicating paragraph 1.36 of the OECD Transfer Pricing Guidelines.
However, in contrast to the OECD Transfer Pricing Guidelines, Art. 56bis LITA does not require analysis of functions in the wider context of where value is added within an overall multinational corporate group.
Moreover, the government states explicitly that Art. 56bis LITA shall also incorporate into Luxembourg tax law the whole of Chapters 2 and 3 of the OECD Transfer Pricing Guidelines, which describe the “traditional transaction methods” and the “transactional profit methods.” The determination of the arm’s length principle shall be conducted by choosing the method that allows the most suitable approximation to the arm’s length price.
Finally, Art. 56bis LITA also contains a non-recognition clause, describing when transactions between related parties can be disregarded for transfer pricing purposes in cases where there is a lack of commercial rationale.
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Very Interesting, Paloma.
Thanks for sharing!
Regarding the 6 steps for analyzing risk, they consist more specifically in: (1) identifying the “economically significant” risks (2) identifying contractual assumption (3) conducting a functional analysis to determine what the parties actually do; (4) if the contractual assumption is aligned with the conduct and facts of the case, namely, whether the parties are actually “living” the contract. In this step, one must ask if the party assuming the risk exercises control and also has the financial capacity to assume the risk; If not, step (5) of the guidance requires allocation of the risk to the group company having the most control and also having the financial capacity to assume the risk.The final step of the framework is to price the transaction, taking into account the full functional analysis of the transaction, including the analysis of risk.