On 31 December 2018, the tax administrations of more than 70 countries will receive and exchange country-by-country (CbC) reports of the multinational enterprises (MNEs) that fall within the scope of their local CbC rules.
Luxembourg, of course, is no exception (read its CbC law in French). For MNEs, this means compliance hurdles as well as, notably, transfer pricing risks. Penalties in this area can rise as high as €250,000 per entity, so it's a very worthwhile exercise for MNEs to review their year-end obligations.
More generally: MNEs, is your CbC report in good shape and can you answer tricky questions about it from tax administrations around the world?
An update on CbC obligations in Luxembourg
Like the last two fiscal years, every Luxembourg taxpayer part of an MNE (as detailed in the law of 23 December 2016) needs to notify the Luxembourg tax authorities whether it is an ultimate parent entity, a surrogate parent entity, or a constituent entity by the last day of the MNE's 2018 fiscal year.
This provision still applies if a CbC notification was submitted in previous fiscal years (and even if the information remains unchanged).
A CbC notification (one per Luxembourg entity) has to be submitted annually and on time, as high penalties (up to €250,000) may apply in cases of late filing or non-compliance with the CbC requirements (e.g. filing with missing or wrong information). The 31 December 2018 deadline is arriving soon for many taxpayers who will file, at the same time, (i) notifications for their constituent entities for FY 2018 and (ii) a FY 2017 CbC report if they have a reporting entity in Luxembourg.
Speaking of reporting entities, one question keeps arising for Luxembourg holding companies that are in the private equity world and that have acquired a target group. Such companies generally won't have consolidated the accounts of the group they acquired, using the so-called PE exemption under Lux GAAP to justify not doing so—but what if their equity interests were listed? Would they have to do it then? It's not always clear. The law obliges such companies to analyse whether they have to consolidate, and consequently whether they have to be the reporting entity for the multinational group they hold. We have performed a number of conclusive analyses under IFRS 10 that are most probably of interest to all private equity groups present in Luxembourg.
How to anticipate risk assessments
Ensuring compliance with Luxembourg rules to avoid penalties is a must, but the CbC report is not only a compliance exercise. Tax administrations will have access to the global value chain of your MNE. Anticipating their tricky questions should now be an essential element of your annual tax risk assessment process.
In September 2017, the OECD published a handbook on effective tax assessment regarding the CbC report, with detailed guidance on how tax authorities can use such information to assess tax risks. This handbook mainly includes 19 tax risk indicators that tax authorities are advised to consider when reviewing CbC reports. For instance, tax authorities should earmark MNE jurisdictions that have material profits but little substantial activity or low tax expenses. This handbook will be the main tool tax authorities use to launch tax audits and inquire about profits made in foreign jurisdictions. (See more on CbC reporting from the OECD).
Therefore, it is paramount that taxpayers proactively analyse the financial data in their CbC reports and identify tax risks in certain jurisdictions. There may be dozens of explanations why a financial ratio looks suspicious initially, but is actually in line with the functional profile of the group entity, with the group business model, or with the economic environment. In other situations, it may be necessary to reorganise or adjust transfer pricing policies so as to mitigate international tax risks.
In short, these CbC rules represent huge compliance work for MNEs. The reports will provide extensive financial data, which is important for transparency—but a side effect is that it equips authorities with lots of information for tax audits. MNEs should thus anticipate risks and prepare for those audits. See more guidance from the Luxembourg tax authorities (French).
For those in Luxembourg, don't forget about the upcoming 31 December deadline for submitting your FY 2018 notifications and FY 2017 CbC reports.
We at KPMG Luxembourg have, through years of experience assessing and analysing MNE tax risks, developed a tailored and advanced risk assessment tool. It's user-friendly and is built around the 19 task risk indicators established by the OECD, together with 10 additional indicators based on the local experiences of our global network.