OECD releases Luxembourg peer review report on implementation of Action 14 Minimum Standards

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1 22 December 2017 Global Tax Alert OECD releases Luxembourg peer review report on implementation of Action 14 Minimum Standards EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 15 December 2017, the Organisation for Economic Co-operation and Development (OECD) released the second batch of peer review reports relating to the implementation of the Base Erosion and Profit Shifting (BEPS) Minimum Standards under Action 14 on improving tax dispute resolution mechanisms. 1 Luxembourg was among the assessed jurisdictions in the second batch. 2 Luxembourg requested that the OECD also provide feedback concerning their adoption of the Action 14 best practices, and therefore, in addition to the peer review report, the OECD has released an accompanying best practices report. 3 Overall the report concludes that Luxembourg meets most of the elements of the Action 14 Minimum Standards. In the next stage of the peer review process, Luxembourg s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Detailed discussion Background In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 on Making Dispute Resolution Mechanisms More Effective. 4 The Terms of Reference translated

2 2 Global Tax Alert the Action 14 Minimum Standards into 21 elements and the best practices into 12 items. The Assessment Methodology provided procedures for undertaking a peer review and monitoring in two stages. In Stage 1, a review is conducted of how a BEPS member implements the Minimum Standards based on its legal framework for Mutual Agreement Procedure (MAP) and how it applies the framework in practice. In Stage 2, a review is conducted of the measures the BEPS member takes to address any shortcomings identified in Stage 1 of the peer review. Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration s (FTA) MAP Forum. In summary, Stage 1 consist of three steps or phases: 1. Obtaining inputs for the Stage 1 peer review 2. Drafting and approval of a Stage 1 peer review report 3. Publication of Stage 1 peer review reports Input is provided through questionnaires completed by the assessed jurisdiction, peers (i.e., other members of the FTA MAP Forum) and taxpayers. Once the input has been gathered, the Secretariat prepares a draft Stage 1 peer review report of the assessed jurisdiction and sends it to the assessed jurisdiction for its written comments on the draft report. When a peer review report is finalized, it is sent for approval of the FTA MAP Forum and later to the OECD Committee on Fiscal Affairs to adopt the report for publication. Minimum standards peer review reports The report is divided into four parts, namely: Preventing disputes Availability and access to MAP Resolution of MAP cases Implementation of MAP agreements Each part addresses a different component of the Minimum Standards. The report includes a number of recommendations relating to the Minimum Standards. In general, the performance of Luxemburg with regard to MAP has proven to be satisfactory in their respective reports. Overall, Luxembourg meets almost all of the elements of the Action 14 Minimum Standards. Preventing disputes The two main elements identified by Action 14 Minimum Standards to prevent disputes are: (i) the inclusion of a provision in existing tax treaties requiring tax authorities to resolve by mutual agreement any difficulties or doubts as to the interpretation or the application of the tax treaty; 5 and (ii) the provision of a roll-back of bilateral or multilateral advance pricing arrangements (APA) that could be relevant in determining the treatment of comparable controlled transactions in previously filed years. Out of Luxembourg s 81 tax treaties, 80 contain a provision equivalent to (i) above. The remaining tax treaty only refers to application and does not include interpretation to define the circumstances that could give rise to a MAP. However, Luxembourg reported that in practice it endeavors to resolve with its treaty partners by mutual agreement any difficulties or doubts arising as to the interpretation or application of tax treaties, whether or not the applicable treaty contains a provision equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention (OECD MTC). Luxembourg signed the Multilateral Instrument (MLI) and it did not make any reservations on the modifications made by Article 16 of the MLI concerning the MAP for all of its existing tax treaties to be covered by that instrument. If the tax treaty referred to previously will not be modified by the MLI, Luxembourg reported that it intends to update it via bilateral negotiations in order to be compliant. In addition, Luxembourg indicated that it will seek to include Article 25(3), first sentence, of the OECD MTC in all of its future treaties. Roll-backs of bilateral Advance Pricing Agreements (APAs) may be granted, subject to compliance with the applicable statute of limitations. Since no request for roll-back of bilateral APAs with Luxembourg has been received by any of the peers, no assessment of the effective implementation of this element has been made. Availability and access to MAP The report also considers the availability and access to MAP. It was noted that nine out of Luxembourg s 81 tax treaties do not contain a provision that is equivalent to Article 25(1) of the OECD MTC. 6 Luxembourg indicated that bilateral negotiations were underway with some jurisdictions to conclude tax treaties in line with the Action 14 Minimum Standards or to amend certain tax treaties to fulfil this objective. Where a tax treaty will not be modified by the MLI, the outcome of which is dependent on the choices made by its treaty partners, Luxembourg reported that it intends to propose the inclusion of Article 25(1) in current or future negotiations on existing tax treaties and in all of its future treaties.

3 Global Tax Alert 3 It was further noted by the peers that Luxembourg has thus far granted access to the MAP in eligible transfer pricing cases, in relation to the application of the anti-abuse provision and if required information is submitted, so that no areas for improvement have been identified on these points. Out of Luxembourg s 81 tax treaties, 77 contain a provision allowing their competent authority to consult together for the elimination of double taxation in cases not provided for in their tax treaties. The ratification of the MLI should settle this issue also for the four remaining treaties. Where a tax treaty will not be modified by the MLI, Luxembourg reported that it intends to propose the inclusion of the aforementioned provision, in current or future negotiations on existing tax treaties, as well as in all of its future treaties. Luxembourg has in the meantime addressed the recommendation made in the report with regard to the need to issue more comprehensive MAP guidance. A Circular 7 detailing the mechanism of the MAP, from the request to initiate the procedure to the termination of the MAP, and explaining the interaction of the MAP with other procedure and legal remedies, was issued on 28 August Resolution of MAP cases The report notes that Luxembourg s competent authority operates fully independently from the audit function of the tax authorities and adopts a pragmatic approach to resolve MAP cases in an effective and efficient manner. Its organization is adequate and the performance indicators used are appropriate to perform the MAP function. The average time needed to resolve MAP cases during the Statistics Reporting Period was months. However, the average time necessary to resolve allocation/attribution cases is significantly longer (40.70 months). Luxembourg specified that more resources have recently been assigned to the competent authority. Furthermore, Luxembourg s tax treaty policy is to provide for mandatory and binding MAP arbitration in its bilateral tax treaties, as a mechanism to provide that treaty-related disputes will be resolved within a specified timeframe. Luxembourg reported that it has opted for part IV of the MLI, which includes a mandatory and binding arbitration provision. Implementation of MAP agreements Lastly, the report notes that Luxembourg also meets the Action 14 Minimum Standards with respect to the implementation of MAP agreements. Although Luxembourg does not monitor the implementation, no issues were reported by peers. In order to ensure that the implementation of MAP agreements is not obstructed by any time limits under domestic law, Luxembourg should include the second sentence of Article 25(2) OECD MTC in its tax treaties or be willing to accept both alternative provisions in Article 9(1) and Article 7(2) for treaties that will not be amended by the MLI. Luxembourg reported that it will opt for the first option in current or future negotiations on existing treaties, as well as in all of its future treaties. Best practice peer review reports Luxembourg has provided information and requested feedback from peers on how it has adopted the 12 best practices contained in the BEPS Action 14 final report. However, for most of the best practices, the peers did not provide any input. Next steps Luxembourg is already working to implement the recommendations made in its peer review and will now move on to Stage 2 of the process, where Luxembourg s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Under the peer review program methodology, Luxembourg shall submit an update report to the Forum on Tax Administration s MAP Forum within one year of the OECD Committee on Fiscal Affairs adoption of the Stage 1 peer review report. Implications In a post-beps world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of Luxembourg s peer review report represents the continued recognition and importance of the need to achieve tax certainty for cross-border transactions for MNEs. While increased scrutiny is expected to significantly increase the risk of double taxation, the fact that tax authorities may be subject to review by their peers should be seen by MNEs as a positive step to best ensure access to an effective and timely mutual agreement process. Furthermore, the peer review for Luxembourg provides insights to taxpayers on the availability and efficacy of MAP. With additional countries continuing to be reviewed, the OECD has made it known that taxpayer input continues to be welcomed on an ongoing basis.

4 4 Global Tax Alert With stakeholder feedback in mind, businesses are encouraged to share their views with the OECD on the peer review for Luxembourg and any other jurisdictions, and to perhaps comment on whether the next iteration of the OECD s assessment of tax administration s MAP performance warrants greater feedback from taxpayers as the primary source. Feedback from the international tax community is the logical next step after peer review, which may help to further validate the current favorable result. Endnotes 1. See EY Global Tax Alert, OECD releases second batch of peer review reports on Action 14, dated 15 December MAP peer review report - Luxembourg. 3. Best practice peer review report - Luxembourg. 4. See EY Global Tax Alert, OECD releases BEPS Action 14 on More Effective Dispute Resolution Mechanisms, Peer Review, dated 31 October Similar to Article 25(3), first sentence, of the 2015 OECD Model Tax Convention in tax treaties. 6. Jurisdictions should ensure that their tax treaties contain a MAP provision which provides that when the taxpayer considers that the actions of one or both of the Contracting Parties result or will result for the taxpayer in taxation not in accordance with the provisions of the tax treaty, the taxpayer, may irrespective of the remedies provided by the domestic law of those Contracting Parties, make a request for MAP assistance, and that the taxpayer can present the request within a period of no less than three years from the first notification of the action resulting in taxation not in accordance with the provisions of the tax treaty. 7. Circular L.G. Conv. D.I. n 60.

5 Global Tax Alert 5 For additional information with respect to this Alert, please contact the following: Ernst & Young Tax Advisory Services S.à r.l., Luxembourg Nicolas Gillet nicolas.gillet@lu.ey.com Fernando Longares fernando.longares@lu.ey.com Anja Taferner anja.taferner@lu.ey.com Ernst & Young LLP, Financial Services International Tax Desk Leader, New York Jurjan Wouda Kuipers jurjan.woudakuipers@ey.com Ernst & Young LLP, Global Tax Desk Network, New York Jose A. (Jano) Bustos joseantonio.bustos@ey.com David Corredor-Velásquez david.corredorvelasquez@ey.com

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