Sponsored by: U.S. and Luxembourg Tax Update AMCHAM Tax Seminar Luxembourg 22 September 2011
Presented by Philippe Neefs Tax Partner, KPMG 2
Agenda Why is transfer pricing a hot topic? Luxembourg recent developments in transfer pricing Latest developments in transfer pricing Overview of transfer pricing worldwide development Global transfer pricing rules and enforcement 3
Why is transfer pricing a hot topic? Results of a Transfer pricing global survey (of 800 international business): 86 % of MNE parent company respondents 93 % of subsidiary respondents 65 % of worldwide trade is performed intra-group Most important international tax issue facing multinational enterprises (risk of double taxation) Audits by tax authorities are becoming a rule, rather than an exception (over 27% of companies audited had a TP adjustment) Transfer prices may have an important effect on a group s taxable income in the different countries in which it operates 4
Luxembourg recent developments in transfer pricing Until now, no formal transfer pricing regulation requirement in Luxembourg. Transfer pricing circulars 164/2 & 164/2bis 28 January 2011: tax treatment of entities carrying out intra-group financing activities 8 April 2011: clarification of the status of Luxembourg entities carrying out intragroup financing activities that obtained binding information from the tax authorities before 28 January 2011 5
Luxembourg recent developments in transfer pricing Scope of the circulars All entities principally realizing intra-group financing transactions Determination of the arm s length price of the tested transaction based on: Comparability to the financial sector Capital requirements and remuneration of the capital at risk related to the financing transaction Binding information from the tax authorities only if: The company assumes the risks in relation with the financing activity. The company has real presence in Luxembourg Validity : 5 years (renewable) 6
Luxembourg recent developments in transfer pricing Analysis of the following elements to be considered as having a real presence in Luxembourg : Luxembourg residence of directors/managers: either the majority of board members are Luxembourg resident or if non-luxembourg resident, are taxable for at least 50% of their global income in Luxembourg Adequate professional knowledge and competence of directors/managers Place of management located in Luxembourg Opening of a bank account in Luxembourg Compliance with all tax return filing obligations Entity not considered as a tax resident of a foreign country Risk/capital requirement 7
Luxembourg recent developments in transfer pricing Risk / Capital requirement: Key in the circular of 28 January 2011 Equity must be adequate to functions performed, risks assumed and assets owned. Equity to be understood as share capital and any reserve which is not freely distributable (e.g. share premium). The company must assume a risk on its intermediary financing activity of at least 1% of its financing volume or EUR 2 million and equity should cover this risk. Objective of this requirement: improve the position of the Luxembourg company as beneficial owner of the interest it receives 8
Luxembourg recent developments in transfer pricing Consequences: New transactions and past transactions (i.e. implemented before 28 January 2011) should by 31 December 2011 at the latest: Have organizational substance in Luxembourg Assume some risks to be covered by equity (at least 1% of the financing volume or EUR 2 million) Sustain the arm s length remuneration with a transfer pricing study 9
Latest developments in transfer pricing 2010 2011 July March approves the 2010 Transfer Pricing Guidelines Revision of chapters I to III of the Transfer Pricing Guidelines; Application of the most appropriate method: no hierarchy in the methods anymore New chapter IX on the transfer pricing aspect of business restructurings. approves the 2010 Update to the Model Tax Convention Revision of the Article 7 of the Model Tax Convention. Permanent establishments assimilated to independent and separate enterprises publishes details on the transfer pricing of intangibles, including intellectual property Framework for analysis of intangible-related transfer pricing issues; Specific categories of transactions involving intangibles; Identification and characterization of an intangible transfer; Valuation issues. 10
Overview of transfer pricing worldwide development The Americas North America Europ, Middle-East & Africa Asia Pacific TP: one of the highest priority issues for the tax authorities; US: focus on the outbound transfer of intangibles; : one of the countries with the toughest TP audits. Latin America TP rules relatively new; Position of the tax authorities still in development; International standard adopted by all Latin American countries except. Expansion of TP rules towards near omnipresence; Adhesion to the arm s length principle and priority given to the most appropriated method; Financial institutions asking for TP documentation; Biggest problem: limited capacity of the tax authorities to make swift resolution of double tax situation. TP: hot button issue; Nature of TP environment: increasingly complex and challenging. 11
Global TP rules and enforcement <1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008/2009 Czech Czech Czech ( of) Czech ( of) of) Czech ( of) of) Czech ( of) of) Czech ( of) of) Czech ( of) of) Czech ( of) of) Czech Hungary ( of) Malaysia Belgium of) Colombia Czech Hungary ( of) Lithuania Malaysia Romania Taiwan ( of China) Belgium of) Colombia Czech Ecuador Egypt Hungary ( of) Lithuania Malaysia Romania Slovenia Taiwan ( of China) Belgium Belgium of) Colombia Czech Ecuador of) Egypt Colombia Czech Finland Ecuador Egypt Greece Hong Kong Hungary Hungary Ireland ( of) Israel Israel ( ( of) of) Lithuania Lithuania Malaysia Malaysia Romania Romania Slovenia Slovenia Spain Spain Sri Lanka Sri Lanka Switzerland Taiwan Taiwan ( ( of China) of China) Turkey Vietnam Vietnam Aruba Belgium of) Colombia Croatia Czech Ecuador Egypt Finland Greece Hong Kong Hungary Ireland ( of) Israel Kazakhstan Kenya ( of) Lithuania Malawi Malaysia Norway Romania Slovenia Spain Sri Lanka Switzerland Taiwan ( of China) Turkey Vietnam Zambia 12
Thanks for your attention! Visit our dedicated website at http://www.kpmg.com/lu/en/whatwedo/tax/transferpricing/pages/default.aspx Philippe Neefs Partner philippe.neefs@kpmg.lu Sophie Boulanger Manager sophie.boulanger@kpmg.lu 13