In 2023, efforts began in Luxembourg to modernise the procedural tax law and introduce new transfer pricing (TP) documentation requirements that already exist in other jurisdictions, including the requirement to submit a local file and a master file. This article will explore these proposed changes as TP documentation has played a significant role in recent audit procedures and as it remains an important topic in potential litigation with the tax authorities.
While modernising the procedural tax law was expected because regulations from the 1940s were outdated, the draft bill seems to prioritise restricting taxpayers’ rights, contrary to the widespread consensus favouring their reinforcement:
The draft bill provides that taxpayers wishing to litigate must first appeal to the head of the direct tax authorities in writing within three months following the issuance of the contested tax assessment. If no response is received within six months of the written request, the taxpayer would be able to appeal at any time to the tribunal. With this provision, the Luxembourg tax administration aimed to establish a timeframe for tribunal access if initial requests are unanswered, but it overlooked the underlying issue of the direct tax authorities lacking resources to properly address taxpayers’ concerns in a timely manner.
The draft intends to make non-binding any annual accounts that were not published on time.
It aims to limit taxpayers’ ability to contest automatic tax assessments in cases where the difference between automatic taxation and actual income or wealth exceeds 10%.
It seeks to increase the formality in filing complaints.
The Chamber of Commerce and members of parliament have criticised the draft law, urging the direct tax authorities to reconsider its provisions. One key concern is the lack of formal closure for audit procedures, leaving taxpayers unaware about any resolution until after the five-year tax assessment period. Consequently, practitioners agree that a closure timeframe should be established for any audit investigation opened by the direct tax authorities.
Since the draft bill addresses both issues, parliament’s scepticism about the benefits of the new procedural tax law may affect the law’s TP documentation requirements. These new requirements – i.e., the local file and master file requirements – may resurface during the new legislative period running from 2023 to 2028, as they aim to integrate all aspects of BEPS Action 13 (country-by-country reporting) into the Luxembourg regulations.
According to the current draft, only members of a group with combined annual revenues exceeding €750 million would face these additional documentation requirements. This quantitative threshold is significantly higher than the thresholds for similar obligations in neighbouring countries. Thus, it appears that the change is intended to claim full Action 13 implementation in Luxembourg rather than to enhance TP documentation by Luxembourg taxpayers.
Further developments expected at local and EU level
To conclude, the market awaits the new government’s agenda and the newly nominated head of the direct tax authorities and hopes for a revised draft of the procedural tax law that provides a clearer framework for tax investigations, thus offering taxpayers more visibility during audits.
Meanwhile, the ‘winds of change’ seem to blow from the EU in the field of TP, as new directives, such as the Business in Europe: Framework for Income Taxation (BEFIT) and a TP directive, were sent by the European Commission to the Council of the European Union for approval at the end of 2023. While this article will not delve into the specifics of these directives, it is worth noting that the European Commission aimed to standardise TP regulations across member states, aligning them with the OECD guidelines. Yet, these directives were not adopted in 2023 and are on hold. Controversies surrounding the BEFIT directive’s common direct tax base have contributed to this delay, and consensus on the TP elements remains difficult to reach.
With the upcoming EU parliamentary elections in June 2024, these initiatives are likely to remain on hold. Nonetheless, with the EU actively shaping TP regulations, further developments can be expected after the elections.
