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Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
Luxembourg tax law is aligned with the Transfer Pricing Guidelines of the Organisation for Economic Cooperation and Development (OECD). As a result, the global formulary apportionment is not considered an appropriate method to determine an arm’s-length price. The five methods detailed in the OECD guidelines (the comparable uncontrolled price method, the resale price method, the cost plus method, the transactional net margin method and the transactional profit split method), which can be split into two categories (the traditional transactions methods and the transactional profit methods), are accepted and acceptable provided, of course, that the taxpayer is able to justify that the method chosen for the determination of an arm’s-length price is the most appropriate in the case at hand.
Ultimately, the burden of proof is with the taxpayers; accordingly, the use of, for instance, the comparable uncontrolled transactions should be substantiated by the availability of comparable transactions without significant differences (geographical location, quantities, transport conditions, insurance, payments modalities…). Likewise, using this method in a market involving few companies, intangible assets or high-value added services would have to be substantiated as well, as it is generally more complicated or it requires significant adjustments to take into account differences with the comparable transactions at hand. In such cases, a different method may be more suitable, depending on the characteristics of the services and the result of the functional analysis.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
There is no hierarchy of preferred methods. The method used should be the most appropriate one. The comparable uncontrolled price method is the most commonly used one.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
The comparability analysis should identify the commercial or financial relations between the associated companies and determine the economically significant circumstances attached to those relations to delineate accurately the controlled transaction. The comparability analysis should then compare the conditions and the circumstances of the intra-group transaction with the ones of comparable transactions of unrelated companies.
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
There are no such special considerations or issues in Luxembourg.
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