The Luxembourg direct tax authorities published guidance (Circular LG Conv. DI No. 60) on August 28 2017 that sets out the mechanism for the implementation of the mutual agreement procedure (MAP) in Luxembourg's tax treaties.
The MAP, which is typically based on Article 25 of the OECD Model Tax Treaty, is a mechanism used to help resolve disputes arising under treaties, harmonise the interpretation and application of the tax treaty in both contracting states, and eliminate juridical and economic double taxation. The MAP requires that the competent authorities (CA) of the treaty partner countries endeavour to resolve instances of taxation not in accordance with the treaty, but ensure it does not mandate a resolution unless the relevant treaty contains an arbitration clause.
The most important practical aspects of the Luxembourg circular are as follows:
- The MAP should be accessible to taxpayers in as many circumstances as possible, including the following cases:
- Where an anti-abuse provision has been applied under a tax treaty or domestic law;
- In disputes related to transfer pricing and any other circumstances where taxation is not in accordance with a treaty;
- Where adjustments made in the other contracting state are based on the initiative of a bona fide taxpayer (e.g. with respect to allocations of profit to a permanent establishment); and
- In all cases relating to a tax audit.
- To initiate the MAP, a taxpayer must submit a written request to the Luxembourg CA within three years from the first notification of the action that results in taxation that may not be in accordance with provisions of an applicable treaty. However, because the deadline for submitting a MAP request varies from treaty to treaty, the treaty should be examined to ensure that the request is filed in a timely manner. The Luxembourg tax authorities take the position that the start date for the three-year period should be construed in the manner least restrictive for the taxpayer.
- The taxpayer provides certain information in the MAP request, such as evidence that the taxpayer is entitled to protection under the treaty and that taxation has been levied not in accordance with the treaty as a result of the actions of the tax authorities in the other contracting state. The taxpayer also must indicate whether the issues relating to the MAP request previously were dealt with by the competent authorities of the treaty partner and/or an administrative or court in that country.
- Once the Luxembourg CA receives the MAP request, it must inform the CA of the other contracting state within four weeks. The Luxembourg CA first will attempt to resolve the issue unilaterally, and if this is possible, the CA will inform the competent tax office, which will make any necessary adjustments or grant appropriate relief as soon as possible. If the Luxembourg CA is unable to resolve the issue unilaterally, it will work with the CA of the treaty partner to attempt to take steps to eliminate the double taxation. However, the circular does not contain any deadline for the CAs to reach agreement. The taxpayer will be informed of the progress and outcome of the procedure.
- Once the MAP commences, no refunds of tax will be granted until the procedure ends. With respect to the EU arbitration convention, the application of either procedure does not preclude the commencement of the other.
The clarifications in the circular are welcome, since the MAP is being used more frequently by Luxembourg taxpayers, based on OECD statistics (e.g. 212 MAP cases initiated in 2015 versus 35 cases in 2010). Overall, the MAP is expected to become more effective due to the commitment by many countries to the minimum standard under Action 14 ('Making dispute resolution mechanisms more effective') of the OECD BEPS project, as well as the OECD Multilateral Instrument (which contains provisions on the MAP), which Luxembourg signed on June 7 2017.