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Controversy and APA practice

In the current international tax environment that has followed the implementation of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, taxpayers are confronted with increased uncertainty about the tax treatment of their intra-group transactions and increased scrutiny by tax authorities in the form of tax audits and potential adjustments.

The challenges


In view of the more aggressive tax audit environment, taxpayers need to consider solutions to manage tax risks and options how to resolve tax controversies. One tool to mitigate such risks are bi- or multilateral Advanced Pricing Agreements (APAs), i.e., an arrangement with two or more tax authorities to obtain certainty on the tax treatment of certain intra-group transactions covered under the APA.

Bi- and multilateral APAs are a new tool for taxpayers in Luxembourg where the focus in the past has been primarily on unilateral APAs or rulings. Although there is no formal bi- or multilateral APA regime in place, the Luxembourg tax authorities (LTA) are willing to entertain applications for bi- or multilateral APAs under the framework of Article 25 on Mutual Agreement Procedures of the respective tax treaty and Circular no 60 issued by the LTA on 28 August 2017.

Under a bi- or multilateral APA, the tax authorities of the respective countries agree on the characterization and transfer pricing methodology to be applied to the intra-group transactions covered under the APA and not to adjust or audit the transfer pricing for a fixed period as long as the critical assumptions of the APA are met. Such APAs are an especially useful risk mitigation tool for complex or high-risk intra-group transactions as well as restructurings. Bi- and multilateral APAs are also endorsed as best practice in Action Plan 14 of the BEPS project.