Be prepared - attention points for the banking entities in the context of anticipated enhanced Transfer pricing ("TP") documentation requirements (Master file and Local file)

Enhanced TP documentation requirements

A Luxembourg tax resident entity in scope of the Bill, upon request from the tax authorities, shall provide the following TP documentation: Master file and/or Local file prepared in line with the Organisation for Economic Cooperation and Development ("OECD") TP guidelines, to support the arm’s length remuneration for intercompany transactions.

The content of Local file and Master file is explicitly defined and can generally be summarised as follows (non-exhaustive list): 

• Local file should cover an overview of the entity and its business activities, its intercompany transactions and detailed economic analysis determining the arm’s length compensation, etc.
• Master file, on the other hand, should cover an overview of the multinational group business activities, structure, value creation chain, intangible assets and financing sources, applied TP policies, key financial information, available TP rulings/arrangements among other relevant aspects.

Entities in scope

Local file: Required from a Luxembourg tax resident entity which is classified as a Constituent entity within the scope of the Luxembourg country-by-country reporting (“CbCr”) requirements (i.e. entity which belongs to a multinational group with the consolidated group revenue exceeding EUR750 million).

Master file: Required from a constituent entity that also meets either of the following financial thresholds:

• an annual turnover equal to or exceeding EUR100 million or
• a closing date balance sheet equal to or exceeding EUR400 million.

Expected implementation date

The Bill has not been voted yet, although, it states that the envisaged requirements are intended to be applied as from tax year 2024, i.e. to any financial year closing during calendar year 2024.

The Amendments to the Bill may be made during the legislative procedure. As mentioned above, the implementation of the Bill needs to be further monitored but we do not expect any conceptual modifications in relation to the enhanced TP documentation requirements as it brings the requirements in line with the OECD TP standards.

Attention points for the Luxembourg banking entities in scope

Below we summarise some of the most common observations from our experience to indicate potential issues and actions that need to be taken in advance to ensure compliance with the Bill.

Despite the Bill being still a draft, it is recommended for the taxpayer to act swiftly to ensure alignment with the enhanced requirements, as they may entail a lot of work and effort. This will help to avoid any potential issues or setbacks that could arise from the complexity and duration of the tasks.

• Group TP documentation

Banking multinational groups typically have their TP documentation, including Master file and Local files, prepared at the group level. Considering that the Local file and Master file requirements may differ from one jurisdiction to another, we strongly recommend ensuring that the available Master file and Local file are up to date and aligned with the Luxembourg and OECD TP requirements.

• Available TP documentation not summarised in a Local file format

It is quite common, that the intercompany transactions of Luxembourg-based banks are covered by the economic analysis and/or supported by the TP reports on a transaction-by-transaction basis, but not summarised in a format of Local file. In this case, a sanity check needs to be performed to ensure the completeness and relevance of the available TP support. As a next step, the compliant Local file needs to be prepared, summarising available information and filling the gaps, if any.

• Meeting specific Local file requirements

Application of TP policies

For certain types of transactions (e.g. interbank lending, forex, intercompany recharges etc.) the banking entities may have only TP policies, rather than customised TP analysis. On the other hand, the Local file requirements directly provide for a detailed disclosure of the economic analysis performed (that might already exist at group level), including details of the comparability and functional analysis, TP method applied, financial data used, adjustments performed etc. whereas TP policy may not always provide for such information.

In this view, the TP policies need to be checked if the respective up-date or enhancement is needed to comply with the Local file requirements.

Testing of the intercompany transactions

Importantly, in line with the OECD Local File requirements, it is foreseen that the Local file should provide for specific information and, inter alia, information on the amounts of payments and receipts for each category of intercompany transactions broken down according to the foreign tax jurisdiction of the payer or the recipient. Generally, it is expected that the above information is tested against the applied TP policies supported by the respective economic analysis.

From a practical perspective, this could be rather an extensive exercise, especially for operational banks, where intercompany transactions are performed almost on a daily basis resulting in a significant number of individual transactions. In this view, the analysis needs to be performed with respect to the availability of such information and possibility of arranging it in an acceptable and easily accessible format.

Considering the potential significant number of transactions, complexity of the financial and contractual data, and the increased focus on TP by the local tax authorities as well as financial regulators (e.g. CSSF), it is crucial to have the TP documentation fully aligned with the requirements of the Bill to avoid a possible risk of challenge.