In pursuit of tax transparency, both the OECD and the EU have taken steps to ensure that cross-border tax rulings and advance pricing agreements will automatically be exchanged when they fall within the scope of the respective framework.
In this article we'll look at how this exchange of information is being implemented in Luxembourg within both the OECD and EU frameworks.
The OECD's work
Last year the OECD issued recommendations1 on the compulsory spontaneous exchange of tax rulings that could give rise to base erosion and profit shifting ("BEPS") concerns.
The categories of tax rulings that fall within the scope of the exchange are:
- rulings related to preferential regimes
- cross-border unilateral advance pricing arrangements
- rulings giving a downward adjustment to profits
- permanent establishment rulings
- conduit rulings
- any other type of ruling where the absence of exchange would give rise to BEPS concerns
Past rulings are implicated by this, i.e. those made on/after 1 January 2010 and still in effect as of 1 January 2014. It also applies to rulings that were modified between 1 January 2010 and 1 April 2016. For those issued before 1 April 2016, the compulsory spontaneous exchange should in principle be completed by the end of 2016. Those issued after 1 April 2016 are also affected by the exchange.
The EU's work
Along similar lines, the EU passed a directive2 last year ("DAC 3") that foresees a mandatory automatic exchange of information on advance cross-border rulings and advance pricing agreements. It covers a broader range of tax rulings than the BEPS action 5 report does, since it covers all tax rulings relating to cross-border transactions.
This exchange started on 1 January 2017, and is relevant to tax rulings issued by the tax authorities of any EU Member State on/after this date. Tax authorities will have to exchange the relevant information three months after the end of the semester during which it was issued, amended, or renewed. It also concerns tax rulings issued, amended, or renewed between 1 January 2012 and 31 December 2013, if they were still valid on 1 January 2014, and those issued, amended, or renewed between 1 January 2014 and 31 December 2016, whether they are still valid or not. Information on these tax rulings will have to be exchanged by the tax authorities before 1 January 2018.
What's happening in the Grand Duchy
Luxembourg has been exchanging tax ruling information in compliance with BEPS Action 5 since early 2016. This exchange was made possible by Luxembourg's already-existing legal bases, i.e. (i) double tax treaties, which enable the spontaneous exchange of foreseeably relevant information; (ii) the law of 26 May 2014 approving the Convention on Mutual Administrative Assistance in Tax Matters of 29 May 2013 (particularly relevant is article 7 on the spontaneous exchange of information); and (iii) the Law of 29 March 2013 on administrative cooperation transposing Directive 2011/16/EU by the EU Council on administrative cooperation in the field of taxation between EU Member States.
Luxembourg has also transposed DAC 3's provisions into domestic law in the form of the Law of 23 July 2016,3 which is in line with the directive's provisions.
Tax rulings falling within the scope of the OECD's recommendations and/or the EU directive are exchanged with foreign tax authorities based on a two-step process:
Step one: the Luxembourg tax authorities provide a summary and some basic information on the ruling, including inter alia the identification of the corporate taxpayer (meaning that individuals are excluded from the scope of this exchange of information), a summary of the tax ruling, the issuance/amendment/renewal date of the tax ruling, its validity, the description of the criteria and economic methodologies used to determine the applicable transfer pricing methodology, and the identification of the foreign entities affected by the tax ruling as well as the parent entities of the Luxembourg corporate taxpayer.
Step two: a copy of the ruling itself is sent to the tax administration (but only if, after receiving the information mentioned in step one, the tax administration requests it).
The BEPS Action 5 recommendations say that the tax ruling information is sent only to the foreign countries concerned (for example a foreign parent company's, or affected entities', country of residence). However, tax ruling information that falls within the scope of the Luxembourg law that transposes the EU directive will in fact be exchanged with all 27 Member States through a common IT platform. This platform is accessible by a representative of the competent authority in each EU country, as well as by the EU Commission. (The Commission, however, will only receive part of the information mentioned above; the names of the taxpayer and of the affected entities will not be communicated to them. The information they get can only be used to demonstrate whether the EU Member States comply with DAC 3).
To perform step one outlined above, the Luxembourg tax authorities use a standardised electronic form (i.e., form 777E for the "international exchange of information on advance cross-border rulings and advance pricing agreements")4 which should be filled out for each relevant tax ruling / advance pricing agreement (issued, amended, or renewed). It complies with the requirements of the EU Commission and is largely inspired by the template released by the OECD in the framework of BEPS Action 5.
The view from inside
Luxembourg has been an active participant in the OECD BEPS project since its beginning and has made a political commitment to apply the new rules. The government continues to stress the need to promote the coordinated implementation of the BEPS Actions at the international level to ensure a level playing field worldwide.
In practice, it is useful to note that:
- With regard to rulings issued in the past and that will be exchanged within the BEPS Action 5 and the DAC 3 frameworks, the limitation period (also called "prescription")—which ranges from 3 to 10 years depending on the countries involved and the relevant facts—may affect major countries' decisions on whether or not to review the consequences of tax rulings issued by other tax jurisdictions.
- With regard to future rulings that will be exchanged under the DAC 3 provisions, the fact that any EU government will be able to access all relevant tax rulings issued by any EU tax authority (through the common IT platform)—even if they are not directly affected by a given ruling—demonstrates the strong willingness of the political world to influence Member States' future tax policies.
1. BEPS action 5 report "countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance" (October 2015).
2. Directive 2015/2376 ("DAC 3") amending EU Directive 2011/16/UE
3. Law of 23 July 2016 on the automatic exchange of information on tax rulings and advance pricing agreements
4. A model of form 777E is available on the website of the Luxembourg tax authorities
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.