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Luxembourg: MAP regime to resolve transfer pricing, international tax disputes

Mutual agreement procedures (MAP) regime

An EU directive was transposed into Luxembourg domestic tax law in December 2019. The directive concerns tax dispute resolution mechanisms in an effort to provide legal certainty as well as to achieve fairer taxation in the EU.

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Background

Historically, domestic tax law remedies were considered to be the first approach to resolve international tax or transfer pricing disputes. Taxpayers often initiated mutual agreement procedures (MAP) to resolve a dispute and to establish certainty. The MAP essentially provided an amicable government-to-government dispute resolution mechanism (procédure amiable) with the competent authorities endeavoring to resolve tax-treaty related disputes on a mutually agreed basis.

Now, more than 135 countries have implemented recommendations from the base erosion and profit shifting (BEPS) project that aims to improve this process. As a consequence, the BEPS Multilateral Instrument (MLI) is available. However, the MLI only affects tax treaties that have been concluded with other jurisdictions that in turn have ratified the MLI and that also include that subject treaty in their list of covered tax agreements. Further, there may be reservations made by the contracting states in adopting the MLI.

In contrast to the MLI, the Luxembourg law provides a uniform framework to resolve tax disputes when other EU Member States are involved. Compared to the EU Arbitration Convention, the new framework is seen as being more efficient—particularly with regard to access to the MAP regime, the length of time it takes under this procedure, and the time for an effective conclusion.

Benefits of new rules in Luxembourg

The new rules under the Luxembourg law of December 2019 apply to any disputes relating to Luxembourg income tax, withholding tax, business tax, and wealth tax related to tax years from 2018 onwards. Among the benefits are the following:

  • Guaranteed outcome within fixed time frame: If the tax authorities do not resolve the tax dispute on a unilateral basis within six months of receipt of the complaint, they are seeking to resolve the dispute by applying the MAP regime within two years after acceptance of the complaint. Thereafter, taxpayers can submit their unresolved case to arbitration. Here, the dispute will be resolved by an advisory commission which is chaired by a judge and composed of independent persons of standing alongside tax officials from the competent authorities. No later than six months after being established, this panel is to deliver an opinion on how to resolve the dispute. The opinion will be binding for the authorities, unless they agree on a deviating decision within the following six months.
  • Broad scope: The new mechanism is not limited to double taxation issues that typically result from transfer pricing adjustments, dual residences or attribution of profits to permanent establishments. Taxpayers can submit any complaint to each competent authority about the interpretation and application of the EU Arbitration Convention and concerning items from intra-EU tax treaties. In Luxembourg, the competent authority is the Administration des contributions directes. A complaint may be submitted not only by companies, but also by individuals. These (natural and legal) persons must be residents of an EU Member State for tax purposes and be directly affected.
  • Process driven by the taxpayer: The complaint must be submitted within three years after notification of the tax assessment, tax audit report, or any other action that results or will result in a tax dispute. The complaint can be pursued in parallel with domestic remedies. If the authorities unduly delay the procedure, the taxpayer can seek judicial review by the Luxembourg courts and, when appropriate, appeal a denial of a complaint or claim the enforcement of a final decision in Luxembourg.

Read more in a KPMG report: Managing transfer pricing disputes [PDF 774 KB] (November 2019)

KPMG observation

The MAP process (with the potential extension into tax arbitration) is seen as being an efficient and effective dispute resolution mechanism. It is particularly suitable to manage transfer pricing disputes when double taxation occurs as a result of an upward adjustment in one EU Member State without any corresponding adjustment in another EU Member State.


Read a December 2019 report prepared by the KPMG member firm in Luxembourg

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