Luxembourg Tax Alert 2021-05
Luxembourg Tax Alert 2021-05
Luxembourg provides guidance on mutual agreement procedures
The Luxembourg tax administration published a circular with practical guidance on mutual agreement procedures (MAP). This will further improve the effective mechanism of MAP that is provided for in the (currently 83) bilateral tax treaties concluded by Luxembourg. Latest statistics from the OECD show a success rate of 75% and a short timeframe of 15 months on average for MAP to solve cross-border transfer pricing disputes.
Independent from and parallel to domestic remedies, taxpayers may request MAP by filing a complaint with competent tax authorities. Mutual agreement procedures can be described as an amicable government-to-government dispute resolution mechanism (in French: procédure amiable). Competent authorities endeavour to solve disputes falling within the scope of tax treaties on the basis of mutual agreement.
As a result of BEPS 14, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) and the EU Directive on Tax Dispute Resolution Mechanisms made this procedure more effective. In fact, competent authorities have to reach a mutual agreement to fully eliminate double taxation or to solve other questions in dispute. Otherwise, the unresolved case will be submitted to mandatory binding arbitration before a panel or commission, which include independent experts.
In the circular issued on 11 March 2021, the Luxembourg tax administration published practical guidance on the process for initiating MAP under bilateral tax treaties.
Provisions for MAP in bilateral tax treaties are generally drafted along the lines of article 25 of the OECD Model Tax Convention. If these treaties are covered tax agreements under the MLI, taxpayers should carefully analyze the date of entry into force, the reservations and choice of optional provisions made by the contracting states. The Luxembourg MAP guidance repeatedly stressed the importance of consulting the relevant articles of the tax treaty and read them in conjunction with the MLI. Synthesized texts published by the tax administration rightfully contain the disclaimer that the authentic legal texts of the tax treaty and the MLI take precedence and remain the legal texts applicable.
In contrast, the EU Directive on Tax Dispute Resolution Mechanisms provides a uniform framework to solve tax disputes in the EU with other member states on the basis of mutual agreement with the potential extension into mandatory binding arbitration. The circular explicitly excludes MAP under the EU Directive. Nonetheless, the following points may also contribute practical guidance for MAP with competent authorities from other EU member states.
- The Luxembourg tax administration emphasizes that the MAP request should clearly identify the bilateral tax treaty and refer to the underlying legal provisions.
KPMG comment: Taxpayers are not party to the diplomatic procedure of MAP. It is therefore of utmost importance that taxpayers present their case in a clear and concise manner in compliance with formal and procedural requirements. There are multiple legal sources with subtle differences in access, procedure and effect. They range from tax treaties to agreements covered by the MLI, the EU Arbitration Convention, the EU Directive on Tax Dispute Resolution Mechanisms and Bilateral Investment Protection Treaties. Taxpayers should carefully review how these different procedures relate to and interact with each other.
- In principle and as determined by the relevant tax treaty, the competent authority in Luxembourg is the Minister of Finance. In practice, MAP requests should be sent by mail to the directorate of the tax administration (Direction de l’Administration des contributions directes).
KPMG comment: Before filing the formal MAP request in writing, taxpayers may ask for a (virtual) meeting with the Luxembourg competent authority to pre-discuss the merits of their case. In some cases, a satisfactory solution may be found on a unilateral basis outside the realm of a MAP.
- The Luxembourg tax administration confirmed that access to MAP shall be granted very broadly and shall only be refused in cases where the taxpayer is not resident in Luxembourg (if required) and where time limits for the MAP request have not been met.
- The Luxembourg tax administration specified that the access to MAP shall not be denied on the sole basis that the MAP request was initiated as a result of the application by tax authorities of domestic or treaty anti-abuse provisions.
Access to MAP shall not be denied on the sole basis that there is an audit settlement by which the taxpayer accepted adjustments made by the tax authorities. The circular highlights that the Luxembourg competent authority acts independently within the framework of mutual agreement procedures in relation to the domestic tax audit department.
The Luxembourg tax administration also accepts multilateral MAP under the condition that there is a tax treaty with a MAP provision between each state concerned.
Furthermore, MAP shall be possible in case of a Luxembourg company with a permanent establishment in a third country. In this case, the Luxembourg competent authority may delegate the negotiation of the MAP to the competent authority of the state of residence of the permanent establishment.
The Luxembourg MAP guidance provides that taxpayers will be allowed access to MAP so that the competent authorities may resolve through consultation the double taxation that can arise in the case of bona fide taxpayer-initiated foreign adjustments.
It is acknowledged that MAP may also be used for the elimination of double taxation in cases not covered by a tax treaty. This may be the case where a person is resident in a third country and has a permanent establishment in Luxembourg and the other contracting state. The competent authorities may consult together how to fill this gap.
Finally, the Luxembourg tax administration will accept protective MAP requests where taxpayers state that no actions are expected until further notice awaiting the outcome of a pending domestic tax dispute.
KPMG comment: The specified cases listed in the MAP guidance are fully in line with the minimum standards set by BEPS 14. According to the standards, countries should not limit access to MAP based on the argument that insufficient information was provided, in the case that the taxpayer provided the required information. It is unfortunate this point was not clearly stated in the published MAP guidance.
In conclusion, the mutual agreement procedure is an efficient and effective dispute resolution mechanism. It is particularly suitable to manage transfer pricing disputes where double taxation occurs as a result of an upward adjustment in one state without any corresponding adjustment in another state.
KPMG Luxembourg can assist you in all phases of tax disputes. To solve international tax and cross-border transfer pricing disputes, we will invoke and safeguard your taxpayer rights in the mutual agreement and arbitration procedure: from filing the complaint, administration of the MAP, submission to tax arbitration and monitoring the implementation of the final decision. We will support your tax position with a robust transfer pricing study and, if necessary, unlock the procedure by lodging domestic remedies with the administrative tribunal in Luxembourg.
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