The first round of Base Erosion and Profit Shifting (BEPS) initiatives triggered legislative updates across the globe, some of which go beyond the initial recommendations, giving rise to growing inconsistencies.
eanwhile, the OECD is proposing even more changes to international tax norms by reallocating taxing rights in a way that recognizes the digitalization of the economy and through development of global minimum tax rules.
In 2019, Ernst & Young launched a Transfer Pricing and International Tax survey to explore the experiences and attitudes of global taxpayers in light of the fast-paced, OECD-proposed measures. The report on “How profound change, transparency and controversy are reshaping a critical business function” (the Survey) analysed the responses of 717 senior tax and transfer- pricing executives representing more than 20 industry sectors in 43 jurisdictions within the Americas, Europe and Asia-Pacific, to questions on how companies are preparing for an era of multilateral policy and administration.
Pressure points around risk and controversy in transfer pricing
The Survey revealed that more than 80% of the respondents consider the greatest impact of the global tax reform will be felt in transfer-pricing rules, with 82% of the respondents having already experienced challenges in this area over the past three years.
While areas currently identified as critical in terms of tax controversy included the transfer pricing of goods (64%), intragroup financial services (41%) and value-added tax (34%), going forward, 49% (up from 33%) of Survey respondents expect challenges around Intellectual Property (IP) to rise, making it the second most important issue within tax controversy. Moreover, the expectations of controversy surrounding permanent establishment issues nearly doubled from 20% to 39%, with respondents displaying particular concern in the area of profit attribution.
Given that the operational areas expected to be impacted cover supply chain (41%), the treasury function and IP strategy, companies will need to take a fresh look at the entirety of their operating model.
In managing their transfer pricing and tax position, 43% of the multinationals surveyed expect to pursue an Advance Pricing Agreement (APA) in the future, with 57% of respondents being satisfied or very satisfied with their current APA processes. The Mutual Agreement Procedure (MAP) process generates less satisfaction among executives, with only 15% having a high or very high confidence in the effectiveness of the process to resolve double taxation disputes.
Are Luxembourg executives ready?
In a global tax and transfer-pricing environment in which traditional principles are being reconsidered, Luxembourg multinationals need to proactively assess how new concepts and rules may affect their business arrangements and tax results.
Luxembourg-based multinationals must be willing to adopt a more strategic approach to transfer pricing as a whole. Transfer pricing that is rooted in operational reality and is globally consistent will prove to be more defensible to tax authorities, even in an era of increased controversy globally. Comprehensive, contemporaneous transfer-pricing documentation is instrumental in responding more quickly and confidently to audit requests and, in this way, mitigates the risk of potential assessments.
To this end, Luxembourg executives need to prepare their boards for the degree of change and transparency that may ultimately result in controversy, as this will impact not only transfer pricing, but also other areas, such as permanent establishment, withholding-tax rates, controlled foreign corporations and treaties.
Let’s hope that the Luxembourg law of 20 December 2019, which entered into force on 27 December 2019 and contains compulsory and binding arbitration between Luxembourg and the other EU Member States and non-EU countries having opted for Mandatory Arbitration (in the context of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS), will provide an efficient framework of dispute resolutions.