Agefi Luxembourg - Janvier 2022

Janvier 2022 9 AGEFI Luxembourg Economie / Banques By Marc RASCH (picture), Transfer Pricing Partner, Marie-Isabelle RICHARDIN, Partner & Beáta BLASCHEK, SeniorAssociate, PwCLuxembourg O ver the last decades globalisa- tion continues to grow lea- ding to numerous intragroup cross-border transactions. These transactions include, amongst others, goods, services, intangibles, and fi- nancial instruments. When engaging in intercompany transactions, often value added tax (VAT) or transfer pricing (TP) consequences are analysed, but less often both are con- sidered simultaneously. One of the reasons may be that there is little guidance in place, so it is more difficult to identify howTPwouldhavean impact on the VAT regulations. Therefore, to manage your intercompany trans- actions, it iskey toanalyse themboth toen- sure the best outcome by mitigating potential large tax exposures. This article considers the interactions between VAT and TP relating to TP adjustments. Furthermore, it describes the possible developments for the cooper- ationbetweendirect taxauthorities andVATauthor- ities in Luxembourg. VAT concepts versus TP In order to understand better the importance of this topic, we start with a brief explanation of the basic principles of VAT andTP. VAT is an indirect tax that is in general bornedby the finalcustomer(usuallyprivateindividuals).Basedon the principle of neutrality, VAT must not represent a final cost for taxpayers. However, considering that inputVAToncostscanonlyberecoveredtotheextent that it relates to aVATable business activity, the situa- tion of taxable persons carrying out VAT exempt ac- tivity (e.g. financial activities) or transactions outside thescopeofVAT(e.g.holdingcompanies)isdifferent. In their case, the inputVAT isnot deductible andrep- resents a final cost. TPis the conceptwhereby the intercompany transac- tions should be priced as if they are concluded be- tween unrelated parties, i.e. based on market prices (beingatarm’slength).Ifthetransactionsbetweenre- latedpartiesarenotpricedatarm’slength,itcouldre- sultinashiftofprofitsfromonejurisdictiontoanother jurisdiction. In order to have an arm’s length pricing, TPadjustments should bemade by the parties to the transactions,orbytaxauthoritiestopreserveaproper level of taxation in their jurisdiction. Interactions betweenVAT andTP The VAT rules apply in principle to all transactions, including intercompany transactions (with a few ex- ceptions namelywhen transactions takeplacewithin aVAT group or between a head office and a branch). Regardlessofwhetherthesupplyofservicesorgoods takes place between taxpayers who belong to the same group or having economic or other specific ties (related parties), both local and cross-border transac- tions are in principle subject to VAT in the same way as if they are completely independent parties. However,whenthepartiestoatransactionarenoten- titled todeductVAT (in full orpartially), the cost of ir- recoverable VAT can be mitigated by overstating or understating the tax- able amount. Recognising this ‘loophole’, the VATDirective does contain inArticle 80 an anti-avoid- anceruleallowingMemberStatesto levyVATona transactionbasedon its open market value rather than the consideration agreed in the fol- lowing three scenarios: 1.thepriceforasupplyislowerthan the openmarket valuewhile the pur- chaser has a limited recovery right; 2. the price for an exempt supply is lower than the open market valuewhile the supplier has a limited recovery right; 3. the price for a supply is higherthantheopenmarket valuewhilethesupplierhas a limited recovery right. In these cases, the tax base of the supply (good or service) will be either: - the open market value that would be applicableunderconditionsoffaircompetition for comparable supplies; or - the costs price of the goods or the full costs incurred by the supplier to supply the service. The EU VAT Directive provides that it is up to the Member States to decide which of the above sce- narios is to be introduced in their domestic legisla- tion. Luxembourg implemented all three scenarios in 2018 then afterwards the Luxembourg VAT au- thorities published the circular letter n°790 on 18 January 2019 to provide guidance on the applica- tion of these measures. It is important to bear in mind that the tax base should only be adjusted if the recovery right of the supplier or the purchaser is limited. If the right to deduct theVAT isnot restricted, the above correction rules are not applicable. However, a TP adjustment can take place in several cases for different reasons. If a transaction between related enterprises is not at arm’slength,adjustmentsshouldbemadeinorderto replicate the conditionsof that transactionhad it been carried out between independent parties. In general, TPadjustments canbemade either by: - taxpayers subject to the intercompany transactions based on their TP policy. Intercompany transactions canbe set basedona spe- cific TPmethod, e.g. a cost plus methodology. How- ever, basedon theoutcomeof a functional analysis or existing TPpolicy, the TPmethodology to test the in- tercompany transactionmayhave tobebasedonan- other TPmethodology, e.g. return on sales. Hence, at year end, a transfer pricing adjustment should be made if the tested profitability is not in line with the actual profitability. TPadjustments couldbemadeon a transactional basis or on anoverall profit basis. - tax authorities in case of an audit. If tax authorities would challenge the arm’s length price of the intercompany transaction, an adjustment may be imposed, i.e. a “primary adjustment”. Atax- payermayopposetheproposedadjustmentandalso reachouttothetaxauthoritiesoftheotherjurisdictions based on international procedures and request for a “correspondingadjustment”. The correspondingad- justment may (partly or inwhole) offset the primary adjustmentwith the purpose tomitigate or eliminate double taxationwith the purpose to ensure a consis- tent allocation of profits between the respective juris- dictions. Further adjustments may be occurring as a result of the above adjustments. Practical examples of observingVAT andTP for intercompany transactions TPadjustmentscantriggerdifferentconsequencesfor VAT purposes. Each case must be examined on its own, as it is possible that a tax base may need to be corrected, but also that there is no VAT consequence as a result of the adjustment. The followingexamples can illustrate different cases: - if the adjustment is the consideration given in ex- change for a supply of goods or services alreadyper- formed (e.g. reconsideration of the price in respect of IPrightstransferred),thetaxbaseoftheperformanced suppliesshouldbecorrectedandreportedassuchthe VAT filings; - if the adjustment is to be treated as a consideration foranewsupplyofserviceorgoods(e.g.aservicecan be identified for the corresponding consideration), then the relating VAT treatment should also be analysed and reported accordingly; - where the adjustment is to be disregarded for VAT purposes (e.gwhere the adjustment cannot be linked directlyandimmediatelytoanyunderlyingsupplies), noconsequenceshouldarisefromaVATperspective. Therefore, when the TPadjustment is to be seen as a consideration given in exchange for a supply of goods or services (first two scenarios), this results in VAT implications under certain conditions (i.e. exis- tence of a consideration, existence of a supply and a directandimmediatelinkbetweentheconsideration and the supply). However, not only theTPadjustment canhaveVAT consequences. Some TP methods may also reveal the absence of the conditions to applyVATonapar- ticular intra-group flow. When the method is not transactional, like residual profit splits, there may be no direct and immediate link between a pay- ment and a supply of goods or services, and hence no VAT triggering event. Furthermore, function can for instance dictate a VAT-exemption. For example, some intermediation services in the financial area are VAT-exempt. But theyneed topass some tests like for instance the ac- tive placement of financial productswith investors, as opposed to mere administrative or marketing support. In summary the appropriate VAT treatment should be assessed on a case-by-case basis, as taxpayers face aVAT risk if the correct tax treatment is not applied. Coordination at tax authorities WhereasboththeVATanddirecttaxauthoritieshave their own field of focus, there is guidance on the co- operationbetweentheLuxembourgtaxauthoritiesas wellasontheexchangeofinformation.DuringtheTP audits since the endof 2020,wehave seen that thedi- recttaxauthoritieshavemadesomereferencestostan- dards applied by the VAT authorities. We are also aware of instances where the Luxembourg VAT au- thorities used the TPpolicy to challenge the price ap- plied on services between related parties and claim additional VAT on this basis. Furthermore, there is a trendof capturingbigdataat taxauthorities, so in the nearfutureitwouldbeeasiertounderstandtheover- all activities of the taxpayer. As a consequence, TP adjustments as described above or other changes in the intercompany trans- actionswill becomemore apparent for theVAT au- thorities and vice versa for direct tax authorities in respect to VATmatters. It is expected that in the near future the cooperation and in particular the exchange of information will significantly increase that could lead to joint audits. This practice already exists in other countries. Conclusion For intercompany transactions, VAT and TP should be lookedat ina coordinatedway as the two types of taxtreatmentarecloselyintertwined.Intheabovewe onlydiscussedthepotentialimpactofTPadjustments on the VAT treatment. However, there are other con- nections between TP and VAT such as the nature of the supplies/functions performed as briefly men- tioned above. Failure to analyse them together could lead to challenges and re-assessments from the Lux- embourg tax authorities. Must-have for intercompany transactions: Combined VAT and transfer pricing approach… or else? We’re here to help you invest in the things that matter most to you. Quintet. For a richer life. For a richer life, however you define it. L es banques de l'Union européenne ont amélioré leur rentabilité au troi- sième trimestre 2021 grâce aux me- sures prises par les pouvoirs publics pendant la crise sanitaire qui ont permis de réduire les volumes de mauvaises créances, souligne lundi 10 janvier l'Auto- rité bancaire européenne (ABE) dans un rapport trimestriel sur les risques dans le secteur bancaire. "La qualité des actifs s'est encore améliorée, mais des inquiétudes demeurent au sujet des prêts qui ont bénéficié de moratoires et de garantie publique en raison notamment des incertitudes créées par le variant Omicron du COVID-19", indique le superviseur européen "La rentabilité s'est stabilisée à des niveaux supé- rieurs à ceux observés avant la pandémie. Dans leur majorité, les banques s'attendent à une haussedesrisquesopérationnelsdusprincipalement aux risques élevés de cybersécurité", relève aussi l'ABE. Le ratio de créances douteuses a baissé de 20 points de base par rapport au troisième trimestre 2020 à 2,1%. De son côté, la rentabilité des fonds propres (RoE) estmontée à 7,7%contre 2,5%auT3 2020 et 5,7%au T3 2019. L'étude de l'ABE a porté sur un échantillon de 131 établissements bancaires représentant plus de 80% desactifsdusecteurbancairedel'Unioneuropéenne. Source : Reuters Les banques de l’UE améliorent leur rentabilité