Gain a better understanding of how the exchange of information on tax rulings is being implemented in Luxembourg within the OECD and EU frameworks.
In the area of tax transparency, both the OECD and the EU have taken steps aimed at ensuring that cross-border tax rulings and advance pricing agreements will automatically be exchanged as long as they fall within the scope of the respective frameworks.
The purpose of this article is to give a broad overview of how the exchange of information on tax rulings is being implemented in Luxembourg within the OECD and EU frameworks.
Last year the OECD issued recommendations on the compulsory spontaneous exchange of tax rulings that could give rise to base erosion and profit shifting (“BEPS”) concerns in the absence of such an exchange.
The categories of tax rulings falling within the scope of the exchange are: (i) rulings related to preferential regimes; (ii) cross-border unilateral advance pricing arrangements; (iii) rulings giving a downward adjustment to profits; (iv) permanent establishment rulings; (v) conduit rulings; and (vi) any other type of ruling where the absence of exchange would give rise to BEPS concerns.
The exchange relates to future rulings (approved since 1 April 2016) as well as past rulings (rulings issued on or after 1 January 2010 and still in effect as from 1 January 2014). It also applies to rulings that have been modified during this period. For rulings that were issued prior to 1 April 2016, this process should in principle be completed by the end of 2016.
Following the OECD-BEPS work on the exchange of information on tax rulings, the EU passed Directive 2015/2376 (“DAC 3”) amending EU Directive 2011/16/UE, which foresees the mandatory automatic exchange of information on advance cross-border rulings and advance pricing agreements.
The type of tax rulings covered by DAC 3 is broader than the one indicated in the BEPS action 5 report, since it covers all tax rulings relating to a cross-border transaction.
The exchange starts as from 1 January 2017 and relates to tax rulings issued as from this date by the tax authorities of any EU member State. In this case, the tax authorities will have to exchange the relevant information three months after the end of the semester during which they were 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, irrespectively of 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.
Luxembourg has committed to exchanging information on tax rulings in compliance with the BEPS Action 5 report. Such an exchange has already started in 2016. This has been possible because Luxembourg for the most part already had necessary legal basis, i.e. double tax treaties, which foresee the spontaneous exchange of information that is of foreseeable relevance, the law of 26 May 2014 approving the Convention on Mutual Administrative Assistance in Tax Matters of 29 May 2013 (in particular article 7 on the spontaneous exchange of information), or 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.
In addition, Luxembourg transposed the DAC 3 provisions into domestic law by the Law of 23 July 2016 on the automatic exchange of information on tax rulings and advance pricing agreements (the “Law”). The law is in line with DAC 3 provisions.
Tax rulings falling within the scope of the BEPS Action 5 recommendations and/or under DAC 3 are and will be exchanged with foreign tax authorities based on a two-step process. In the first step, the Luxembourg tax authorities only 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 (including a description of the commercial activities and transactions), 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, the identification of the foreign entities affected by the tax ruling as well as the parent entities of the Luxembourg corporate taxpayer, etc. Tax administrations receiving this information can thus determine whether they wish to request a copy of the ruling itself which would then be communicated in a second step.
Whilst according to the BEPS Action 5 recommendations the information on tax rulings would only be communicated to the concerned foreign countries (e.g. country of residence of the foreign parent company or of the affected entities), information on tax rulings falling within the scope of the Law will in fact be exchanged with all 27 Member States through a common IT platform accessible by a representative of the competent authorities of each EU country, as well as with the EU Commission. The EU Commission will however only receive part of the information mentioned above; the names of the taxpayer and of the affected entities will not be communicated to the EU Commission. The information provided to the EU commission can only be used to demonstrate whether the EU Member States comply with DAC 3.
In order to perform the first step of the exchange process, the Luxembourg tax authorities will use a standardised electronic form (i.e., form 777E for the “international exchange of information on advance cross-border rulings and advance pricing agreements”, for which a model is available on the website of the Luxembourg tax authorities) . This form, which is to be filled out for each relevant tax ruling / advance pricing agreement (issued, amended, or renewed), 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.
Luxembourg has been an active participant in the OECD BEPS project since its beginning and has made the political commitment to apply the new rules that result from this work. 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: