Spotlight On... Contact

KPMG Luxembourg Philippe Neefs

Partner, Transfer Pricing Leader Tel: +352 22 51 51 5531 Email: philippe.neefs@kpmg.lu

Sophie Boulanger

Manager, Transfer Pricing Tel: +352 22 51 51 5423

Email: sophie.boulanger@kpmg.lu Website: www.kpmg.lu

Transfer Pricing Compliance in Luxembourg

Philippe Neefs & Sophie Boulanger, KPMG Luxembourg

“Transfer pricing is not only a matter of documentation but much more of being able to implement and maintain the transfer pricing policy that has been developed.”

P Q

hilippe Neefs is a partner at KPMG Luxembourg since 2007 and advises on both international taxation structures and transfer pricing. Speaking of transfer pricing, he has

participated to the implementation of the first transfer pricing regulation in Luxembourg by leading a working group of discussion with the Luxembourg tax authorities and has set up the KPMG Luxembourg transfer pricing department since then.

Sophie Boulanger is a transfer pricing manager at KPMG Luxembourg. She participates in the development of the transfer pricing practice.

They assist their clients with their transfer pricing manuals, local as well as global transfer pricing documentation but also in transfer pricing planning linked to the international structures implemented through Luxembourg. They are regularly involved in APA discussions with the tax authorities, both unilateral and bilateral.

How would you characterise Luxembourg’s Transfer Pricing environment?

Transfer pricing is clearly becoming key in the mindset of the Luxembourg tax authorities. This does not mean that they are going for more transfer pricing audits but rather that they consider transfer pricing as a tool to reinforce the cross- border structures implemented via Luxembourg and to evidence their alignment with the EU and OECD trends towards more transparency. The environment is therefore positive in the sense that transfer pricing documentation is more and more welcomed by the tax authorities to set an open and honest dialogue with the taxpayers.

Q

What methods of transfer pricing are currently available there?

All OECD methods are accepted in Luxembourg as long as it can be proven that the method used is the most appropriate to the case at hand. One specificity of the market needs to be highlighted: the possibility to use “another method” that would

be more appropriate than the traditional and transactional methods is really well accepted by the Luxembourg tax authorities. For example, the use of specific financing instruments leads us to often develop methodologies using probabilities and statistics in order to sustain the arm’s length character of the transactions we put in place.

Q

Are there any challenges related to transfer pricing that companies should be aware of?

The main challenge concerns the quick evolution of the practice, in advance to specific transfer pricing documentation rules. Indeed, while only one regulation specifically tackles the documentation of intermediary financing transactions, the market is already anticipating the issue of more global transfer pricing rules and taxpayers tend to document more their transactions crossing Luxembourg, most generally related to intangibles and services with also a rapid development of documentation for banking transactions. In this respect, the taxpayers who do not follow this trend yet will probably experiment hard times in trying to catch up.

In addition, the debates around tax morality, transparency and exchange of information to which the Luxembourg government adheres will oblige taxpayers to increase the level of documentation to be adequately equipped to face potential challenges from foreign tax authorities. The attention of our clients must also be drawn towards the development further to the OECD discussion draft on transfer pricing documentation and country by country reporting published on January 30, 2014.

Another topic linked to the above for which we anticipate more pressure in the future is the use of the transfer pricing concepts of functions, risks and assets in order to sustain a relevant level of economical substance.

Q

How might companies tackle these challenges?

By preparing documentation in line with the expectations of the countries concerned by

55

their transactions in advance and not waiting for a potential challenge but also by increasing transparency and regular dialogue with the tax authorities prior to complex transactions. This is an approach we see more and more applied by multinationals. The application for unilateral advance pricing agreements (APAs) but a fortiori for multilateral APAs to secure in advance their business models is a good strategy.

Q

What are your top tips for maintaining compliancy for transfer pricing in

Luxembourg?

Transfer pricing is not only a matter of documentation but much more of being able to implement and maintain the transfer pricing policy that has been developed. In this respect, operating transfer pricing will be key to be able to rely on safe and sustainable operationals able to assess on a regular basis that the business is in line with the policy but also on enabling-technology to report and monitor the transfer pricing policies in an efficient manner.

Q Is there anything else you would like to add?

As tax authorities are more and more keen to determine the drivers within the value chain of multinational enterprises, the final guidelines on the transfer pricing aspect of intangibles, whose discussion draft was released on June 6, 2012, is expected with anxiety by our clients. Without any doubt, it should be a future hot topic in the Luxembourg market.

SPOTLIGHT ON...