This document will become Chapter X of the OECD Transfer Pricing Guidelines, an update to the original version published in 1995. The guidelines are used by taxpayers and tax authorities around the world to determine and audit prices that entities of a same group charge each other for goods, services, intellectual property, etc. As from now, dedicated instructions regarding loans, cash pools, guarantees or insurance premiums, among others, will be included in the guidelines.
Luxembourg explicitly adhered to the OECD Transfer Pricing Guidelines with changes to its tax code in 2015 and 2017. This is very recent compared to other EU and international developed economies, which have been generally following these rules since their inception and therefore the Luxembourg administration is quickly catching up with the application of OECD guidance.
Given the role of Luxembourg as a finance and treasury center for many multinational enterprises, the new Chapter X is expected to have a material impact in the country. It confirms many of the traditional practices used in the pricing of financial transactions between related parties, but it also develops new concepts and methodologies that make it advisable for multinational enterprises to review their transfer pricing policies for financial transactions.
One such area is the amount of related-party debt that a taxpayer can bear, i.e., its debt capacity. In many territories, including Luxembourg, the debt capacity of a taxpayer has traditionally taken a backseat in transfer pricing considerations for a number of reasons: existence of safe harbors, application of rules of thumb, focus on interest rate applied on loans rather than the quantum of those loans, among others. The OECD guidelines now recommends that taxpayers make an analysis of their debt capacity when they obtain a loan from a related party.
Another such area is the price to be charged by a cash pool leader to its participants. The new OECD instructions develop the methodologies to be used to determine the margin or spread to be kept by a cash pool leader when managing the cash pool for its related group entities. Multinational groups with cash pool operations--some of them led from Luxembourg--are likely to review their internal policies to ensure adherence to the new guidelines proposed by the OECD.
It should be noted, that the published OECD guidelines constitutes “soft law”, i.e., it is not directly applicable to taxpayers. However, this guidance is the manual that tax authorities around the world use when conducting tax audits. In Luxembourg, the administration is expected to follow the provided guidance when assessing transfer pricing of financial transactions from now on.