Following the recent vote of the Council Directive introducing the mandatory automatic exchange of Country-by-Country (“CbC”) Reports between EU Member States (see our Tax alert from 7 June 2016), the Luxembourg government, on 2 August 2016, lodged a draft law transposing this Directive into Luxembourg law (the “Draft Law”) before the Luxembourg Parliament.
This alert summarises the main features of the Draft Law which (once voted) should apply from the tax year 2016 onwards.
The obligation of preparing a CbC Report applies to very large multinational enterprise (“MNE”) groups whose total consolidated group revenue exceeds €750 million (or an amount in local currency approximately equivalent to €750 million) during the previous fiscal year.
The CbC Report should contain:
The CbC Report should be filed by taxpayers within 12 months following the last day of the reporting fiscal year of the MNE group. For example, if the reporting fiscal year ends on 31 December 2016, taxpayers would have to file the first CbC Report by 31 December 2017 at the latest. The Luxembourg direct tax authorities would then have a maximum of six months to exchange this report (i.e. by 30 June 2018) for the first year. However, the time period for the exchange is reduced to three months for the following years (i.e. 15 months after the last day of the fiscal year of the ultimate parent entity).
According to the Draft Law, every ultimate parent entity of an MNE group that is resident for tax purposes in Luxembourg, or any other reporting entity defined in accordance with Section II of the annex to the Draft Law, should file a CbC Report with the Luxembourg direct tax authorities. As foreseen in the Directive, the Draft Law thus introduces the so-called “secondary mechanism” whereby the reporting obligation is, in certain cases, shifted from the ultimate parent company to a Luxembourg subsidiary or permanent establishment.
The Luxembourg direct tax authorities should, by means of automatic exchange, communicate the CbC Report to other EU Member States and to other jurisdictions that have signed an agreement foreseeing such an automatic exchange (i.e. on the basis of the list of countries which are signatories to the OECD multilateral competent authority agreement on the exchange of CbC Reports) and that are listed in a grand-ducal decree still to be issued. The CbC Report should be exchanged if, on the basis of the information mentioned in the report, one or more entities of the MNE group are either resident for tax purposes in the participating country or subject to tax therein with respect to the business carried out through a permanent establishment.
The information in the CbC Reports shall be used solely for the purposes of assessing any BEPS risk, in particular transfer pricing risks, and of performing economic and statistical analyses. If the tax authorities have concluded that there is a certain risk, they may enter into a tax audit and subsequently proceed to transfer pricing adjustments, where appropriate. Consequently, transfer pricing adjustments cannot be directly based on the information contained in the CbC Report.
The Luxembourg direct tax authorities should be in charge of controlling whether taxpayers have fulfilled their obligations deriving from the Draft Law and that they have not engaged in practices that have the effect of circumventing the exchange of CbC Reports.
The competent Luxembourg tax office may impose a fine of maximum €250,000 on the reporting entity in cases of non-filing or of late, incomplete or incorrect filing of the CbC Report. The fine should also be imposed in case of non-compliance with the filing rules (e.g. the notification requirements foreseen in the annex to the Draft Law). This fine corresponds to the fines to be imposed with regard to non-compliance under the FATCA and CRS regulations. Taxpayers may challenge the decision of the tax office in front of the Administrative Tribunal.
The Draft Law is a lean transposition of the Directive. The definitions of the Directive are reproduced verbatim and clear references are made to the 2015 Final Report on Action 13 of the OECD/G20 BEPS Project. In particular, the Draft Law will also apply to the financial sector (i.e. banks and any investment entities). The financial sector should thus be aware of the OECD guidance from 29 June 2016. This guidance clarifies the application of the CbC Reporting to investment funds and partnerships, indicating that they are in scope and do not benefit from an exception as long as the accounting rules require investment entities to consolidate with their subsidiaries.
The CbC Report is part of the three-tiered standardised approach of the BEPS Action 13. The Draft Law, combined with Article 171 (3) of the Abgabenordnung (Fiscal Code) requiring transfer pricing documentation for Luxembourg taxpayers since 2015, stresses the importance of the other two standards of transfer pricing documentation, i.e., the local file and the master file. These files are extensively described in the 2015 Final Report on Action 13 of the OECD/G20 BEPS Project and in the EU Code of Conduct on Transfer Pricing Documentation from 2006. The local and master file will demonstrate the compliance of MNE groups with the arm’s length principle and, at the same time, will give some color to the rough data gathered in the CbC Reporting to avoid misinterpretation and, ultimately, bring clarity to the risk assessments to be performed by tax authorities.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.