On 20 January 2022, the Organisation for Economic Cooperation and Development (OECD) issued an update to its July 2017 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Transfer Pricing Guidelines). There are significant changes to the guidance in respect of the profit split method, hard-to-value intangibles (HTVI) and financial transactions.
Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles
On 21 June 2018, the OECD released the report Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles, under it Base Erosion and Profit-Shifting (BEPS) Action 8 (which was the development of transfer pricing rules or special measures for transfers of HTVI aimed at preventing BEPS by moving intangibles among group members). This new guidance was aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of this approach. It included a number of examples to clarify the application of the HTVI approach in different scenarios and addressed the interaction between the HTVI approach and the access to the mutual agreement procedure under the applicable tax treaty. This guidance has now been formally incorporated into the Transfer Pricing Guidelines as a new Annex II to Chapter VI (Special Considerations for Intangibles) of the Transfer Pricing Guidelines.
Revised Guidance on the Application of the Transactional Profit Split Method
On 21 June 2018, the OECD released the report Revised Guidance on the Application of the Transactional Profit Split Method, under BEPS Action 10 (which was the development of rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This would involve adopting transfer pricing rules or special measures to clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains). The new guidance retained the premise that the profit split method should be applied where it is found to be the most appropriate method to the case at hand, but it significantly expanded the guidance available to help determine when that may be the case. It also contained more guidance on how to apply the method, as well as numerous examples. This guidance has now replaced the previous text on the application of the profit split method in Section C, Part III of Chapter II and in Annex II to Chapter II (Transfer Pricing Methods) of the Transfer Pricing Guidelines.
Guidance on Financial Transactions
On 11 February 2020, the OECD released the report Transfer Pricing Guidelines on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10, Action 4 being limiting base erosion involving interest deductions and other financial payments, especially through the development of transfer pricing guidance regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements. Sections A to E of the report have been included as a new Chapter X of the Transfer Pricing Guidelines, while the guidance in Section F of the report (on how to determine a risk-free rate of return and a risk-adjusted rate of return) has been added to Section D.1.2.2 in Chapter I (The Arm’s Length Principle) of the Transfer Pricing Guidelines, immediately following paragraph 1.106.
Section B.1 elaborates on the accurate delineation analysis of the capital structure of a multinational enterprise (MNE) within an MNE group, while Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C to E provide guidance on treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance, including in each case accurate delineation and pricing.
How can we help?
The Luxembourg transfer pricing legislation closely follows the Transfer Pricing Guidelines and is provided by Articles 56, 56 bis and 164 of the Income Tax Law (ITL), as well as Paragraph 171 of the General Tax Law (GTL). While the Transfer Pricing Guidelines are ‘soft law’ only and have no direct binding effect on taxpayers, the Luxembourg tax authorities and courts nonetheless refer to the Transfer Pricing Guidelines regarding the application of the Luxembourg transfer pricing rules. Hence the importance to ensure that controlled transactions involving Luxembourg comply with the updated Transfer Pricing Guidelines.
The Tax Partners and your usual contacts at Arendt & Medernach are at your disposal to assess further and advise on the impact of the new Transfer Pricing Guidelines on your related party charges and your transfer pricing documentation.