Luxembourg: Guidance on mutual agreement procedures

Luxembourg: Guidance on mutual agreement procedures

The Luxembourg tax administration on 11 March 2021 published a circular providing guidance on the process for initiating the mutual agreement procedures (MAP) under bilateral income tax treaties.

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The circular guidance can be used by taxpayers to gain access to the MAP as currently provided for in the 83 income tax treaties to which Luxembourg is a treaty partner.

Provisions for the MAP in bilateral tax treaties are generally drafted along the lines of Article 25 of the OECD Model Tax Convention. If the subject treaties are “covered tax agreements” under the Multilateral Instrument (MLI), taxpayers need to analyze the date of entry into force, any reservations, and the choice of optional provisions made by the contracting states. The Luxembourg MAP guidance stresses the importance of consulting relevant articles of the tax treaty and then to read these articles in conjunction with the MLI. The synthesized texts (as published by the tax administration) typically include a disclaimer that the authentic legal texts of the tax treaty and the MLI take precedence and remain the applicable legal texts.

The Luxembourg circular explicitly excludes MAP under the EU Directive on Tax Dispute Resolution Mechanisms. Nonetheless, the following points may offer practical guidance with regard to the MAP when competent authorities of other EU Member States are involved.

  • The Luxembourg circular emphasizes that a MAP request must clearly identify the bilateral tax treaty and refer to the underlying legal provisions.


KPMG observation

Taxpayers are not a party to the diplomatic procedure of the MAP. Therefore, taxpayers need to present their case in a clear and concise manner as well as in compliance with formal and procedural requirements. There are multiple legal sources with subtle differences in access, procedure, and effect that 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 need to consider carefully reviewing 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 are to be sent by mail to the directorate of the tax administration (Direction de l’Administration des contributions directes).


KPMG observation

Before filing a formal MAP request in writing, taxpayers may ask for a (virtual) meeting with the Luxembourg competent authority to discuss the merits of the case. In some instances, a satisfactory solution may be found on a unilateral basis outside the realm of the MAP.

  • The Luxembourg tax administration confirmed that access to the MAP is to be granted very broadly and only refused in cases when the taxpayer is not a resident in Luxembourg (if required) and when time limits for the MAP request have not been met.
  • The Luxembourg circular specifies that access to the MAP is not to be denied on the sole basis that the MAP request was initiated as a result of the application of domestic or treaty anti-abuse provisions, as asserted by the tax authorities.
  • Access to the MAP is not to 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 MAP framework in relation to the domestic tax audit department.
  • The Luxembourg tax administration also accepts multilateral MAPs under the condition that there is a tax treaty with a MAP provision between each state concerned.
  • A MAP is possible in situations when there is a Luxembourg company with a permanent establishment in a third country. In such instances, the Luxembourg competent authority may delegate the MAP negotiations to the competent authority of the state of residence of the permanent establishment.
  • The Luxembourg MAP guidance provides that taxpayers will be allowed have access to the MAP so that the competent authorities may resolve, through consultation, double taxation issues that can arise in the case of bona fide taxpayer-initiated foreign adjustments.
  • The MAP may also be used for the elimination of double taxation in cases not covered by a tax treaty—such as when a person is resident in a third country and has a permanent establishment in Luxembourg. The competent authorities may consult together how to address the issue.
  • The Luxembourg tax administration will accept protective MAP requests when taxpayers state that no actions are expected until further notice, on awaiting the outcome of a pending domestic tax disputes.


KPMG observation

The specified situations listed in the MAP guidance are in line with the minimum standards set by BEPS 14. According to the BEPS 14 standards, countries are not to limit access to MAP based on the argument that insufficient information was provided when the taxpayer has in fact provided the required information. This point was not clearly stated in the Luxembourg published MAP guidance.

Conclusion

The MAP is an efficient and effective dispute resolution mechanism that is particularly suitable to manage transfer pricing disputes when double taxation occurs as a result of an upward adjustment in one country without any corresponding adjustment in another country.

Read a March 2021 report prepared by the KPMG member firm in Luxembourg

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