OECD publishes updated transfer pricing guidelines
On January 20, 2022, the Organization for Economic Co-operation and Development (OECD) released an update to its July 2017 report Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Transfer Pricing Guidelines). Significant changes have been made to guidance on the profit split method, hard-to-value intangibles (HTVI) and financial transactions.
Guidance for tax administrations on applying the approach to hard-to-value intangibles
On June 21, 2018, the OECD published the report Guidance for tax administrations on applying the approach to hard-to-value intangibles, under Action 8 on Base Erosion and Profit Shifting (BEPS) (which was to develop transfer pricing rules or special measures for transfers of HTVI aimed at preventing BEPS by moving intangibles between group members). These new guidelines aimed to achieve a common understanding and practice between tax administrations on how to apply the 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 discussed the interaction between the HTVI approach and access to 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 Relating to Intangibles) of the Transfer Pricing Guidelines.
Revised guidance on applying the transactional profit split method
On June 21, 2018, the OECD published the report Revised guidance on applying the transactional profit split method, under BEPS Action 10 (which was the development of rules to prevent BEPS by engaging in transactions that would not, or only very rarely, occur between third parties. This would involve adoption of transfer pricing rules or special measures to clarify the application of transfer pricing rules, in particular profit sharing, in the context of global value chains). The new guidelines have retained the principle that the profit split method should be applied when it is found to be the most appropriate method in the case in question, but they have considerably expanded the guidance available to help determine when this may be the case. It also contained more tips on how to apply the method, as well as many examples. This guidance has now replaced previous text on the application of the profit split method in Section C, Part III of Chapter II and Annex II of Chapter II (Transfer Pricing Methodologies) of the Guidelines. on transfer pricing.
Advice on financial transactions
On February 11, 2020, the OECD published the report Transfer Pricing Guidelines for Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10, Action 4 being to limit base erosion involving interest deductions and other financial payments, in particular through the development of transfer pricing guidance on the pricing of financial transactions between related parties, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank transactions), and captive insurance and other arrangements. Sections A to E of the report have been included as new Chapter X of the Transfer Pricing Guidelines, while the guidance from 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 of Chapter I (Arm’s length principle) of the Transfer Pricing Guidelines, immediately after paragraph 1.106.
Section B.1 develops the precise analysis of the delineation of the capital structure of a multinational enterprise (MNE) within an MNE group, while Section B.2 describes the economically relevant characteristics that shed light analysis of the terms and conditions of financial transactions. Sections C to E provide guidance on treasury functions, intragroup lending, cash pooling, hedging, guarantees and captive insurance, including in each case precise delineation and pricing.
How can we help?
Luxembourg transfer pricing legislation closely follows the Transfer Pricing Guidelines and is provided for by Articles 56, 56 bis and 164 of the Income Tax Law (LIR), as well as by article 171 of the general tax law (LGI). Although the Transfer Pricing Guidelines are only “soft law” and have no direct binding effect on taxpayers, Luxembourg tax authorities and courts nevertheless refer to the Pricing Guidelines regarding the application of Luxembourg transfer pricing rules. Hence the importance of ensuring that controlled transactions involving Luxembourg comply with updated transfer pricing guidelines.