On 13 December 2016, the Luxembourg parliament voted (first vote1) the country-by-country (CbC) reporting bill (the Bill), which implements the EU Directive 2016/881 of 25 May 2016 (the Directive) into Luxembourg law.2The main principles contained in the Bill are developed in the articles per se, whereas all the definitions can be found in an appendix.
It will apply as from the fiscal year 2016, i.e. the first declaration to be prepared will be that of the fiscal year starting on or after 1 January 2016.
The ultimate parent entity of a MNE Group that is Luxembourg tax resident must, on an annual basis, file a CbC report with the Luxembourg tax authorities (LTA)3, with respect to its Reporting Fiscal Year. In some cases, a different entity than the ultimate parent entity, may be appointed / designated by law to file the report. The filing must be done within 12 months of the last day of the Reporting Fiscal Year by the relevant Reporting Entity .
In turn, the LTA shall communicate the CbC report to any other jurisdiction subject to filing4 in which, on the basis of the information contained in the CbC report, one or more Constituent Entities of the MNE Group of the Reporting Entity are either tax resident or subject to tax through a permanent establishment. This should be done by means of automatic exchange and within 15 months of the last day of the Reporting Fiscal Year of the MNE Group to which the CbC report relates. An exception to the 15-month deadline applies for the first CbC report for which the deadline is increased to 18 months.
For the purpose of CbC reporting, a MNE Group is considered to be a group of two or more related enterprises, tax resident in different jurisdictions (or a single enterprise tax resident in one jurisdiction, but also subject to tax in another jurisdiction via a permanent establishment), with a total consolidated group revenue of more than EUR 750 million during the fiscal year immediately preceding the Reporting Fiscal Year (or the equivalent amount in another currency as of January 2015).
A Constituent entity is:
- any separate business unit of an MNE Group that is included in the Group's consolidated financial statements for financial reporting purposes, or would be so included if equity interests in such business unit of an MNE Group were traded on a public securities exchange;
- any such business unit that is excluded from the MNE Group's consolidated financial statements solely based on size or materiality grounds;
- any permanent establishment of any separate business unit of the MNE Group, included in the above definitions, provided that the business unit prepares a separate financial statement for such establishment.
The Reporting Entity is the Constituent Entity that is required to file a CbC report in its tax residence jurisdiction on behalf of the MNE Group. The Reporting Entity may be:
- the ultimate parent entity,
- a surrogate parent entity appointed by a Constitutive Entity of the MNE Group to file the CbC report, as a sole substitute of the ultimate parent entity, where one or more of the below conditions apply:
- the ultimate parent entity of the MNE Group is not obligated to file a CbC report in its jurisdiction of tax residence5
- the jurisdiction in which the ultimate parent entity is resident for tax purposes has a current international agreement to which Luxembourg is a party, but does not have a qualifying competent authority agreement in effect to which Luxembourg is a party, by the date of the CbC report filing deadline for the Reporting Fiscal Year;
- there has been a systemic failure of the jurisdiction of tax residence of the ultimate parent entity that has been notified by the LTA to the Luxembourg tax resident Constituent Entity.
- an entity that is neither of the above in case of secondary mechanism, i.e. when:
- the entity is Luxembourg tax resident;
- one of the conditions detailed in the case of surrogate parent entity applies.
Reporting Fiscal Year means the annual accounting period with respect to which the ultimate parent entity of the MNE Group prepares its financial statements, the financial and operational results of which are reflected in the CbC report.
Content of the CbC report
The CbC report, which must be filed in the prescribed form (as of now, three tables have been communicated, which are the tables initially issued by the OECD in its Action 13 of BEPS Action Plan and also included in the Directive), shall contain the following information with respect to the MNE Group:
- in a first table: aggregate information relating to the amount of revenue, profit (loss) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash or cash equivalents with regard to each jurisdiction in which the MNE Group operates;
- in a second table: an identification of each Constituent Entity of the MNE Group setting out the jurisdiction of tax residence of that Constituent Entity and, where different from that jurisdiction of tax residence, the jurisdiction under the laws of which that Constituent Entity is organised, and the nature of the main business activity or activities of that Constituent Entity.
- in a third table: additional information or explanations must, where appropriate, be communicated in order to facilitate the understanding of the above information.
Penalties in case of non compliance
Penalties amounting to a maximum of EUR 250,000 may apply to the Reporting Entity or the resident Constituent entity in the following cases:
- late filing or notification;
- absence of any filing or notification;
- communication of incomplete or inaccurate information;
- not meeting the obligation to inform the LTA of the refusal of the ultimate parent entity to make the information necessary to the filing available (in case of secondary filing).
The amount is determined by the tax office in charge of the Reporting Entity concerned. The latter has the possibility to appeal the decision6 in front of the administrative tribunal.
Responsibilities of the LTA in terms of data usage and control
Data usage. Information communicated to the LTA shall solely be used for the purposes of assessing high-level transfer pricing risks and other risks related to base erosion and profit shifting, including assessing the risk of non-compliance by members of the MNE Group with applicable transfer pricing rules, and where appropriate for economic and statistical analysis. Transfer pricing adjustments by the LTA shall not be based on the information exchanged via the CbC report. Notwithstanding the above, there is no prohibition on using the information communicated between Member States, pursuant to the CbC report, as a basis for making further enquiries into the MNE Group's transfer pricing arrangements or into other tax matters in the course of a tax audit. As a result, appropriate adjustments to the taxable income of a Constituent Entity may be made.
Control. The LTA will have the authority to verify that obligations linked to the CbC report are respected and to make sure that the Constituent entities of the MNE do not set up strategies to avoid communicating information. The LTA have the same rights and powers for that purpose as those foreseen in case of tax assessment or tax audit.
The Bill as voted strictly follows the wording of the Directive on who should report and how while enlarging the exchange of information to non Member States (provided they are filing jurisdictions listed in a Grand-Ducal Decree). Luxembourg tax resident Reporting Entities and other Luxembourg entities should ensure they are ready to file their first CbC report by 31 December 2017 (when the Reporting Fiscal Year coincides with the calendar year) and moreover ready to proceed with notification requirements. With respect to the latter, according to the text, notification should be made by the last day of the Reporting Fiscal Year, i.e. 31 December 2016. In addition, secondary filing is, under the current text, needed when the ultimate parent entity of the MNE Group is not obligated to file a CbC report in its jurisdiction of tax residence, which suggests that voluntary filing cases are out of scope (which is not in line with the latest OECD guidance released on the matter). However, further developments and additional guidance are expected on which we will communicate once the information is available.