Agefi Luxembourg - décembre 2024

Octobre 2023 17 AGEFI Luxembourg Economie / Banques By Hermann SCHOMAKERS, Tax Director &Begga SIGURDARDOTTIR, Tax Partner, PwC Luxembourg I n today’s complex andhighly regulated environment, thema- nagement of tax risks has be- come a critical function for companies. While each industry and every busi- ness carry unique tax risks, there is a general approach to managing tax risks. This article will explain this general approachand presentapracticalsolution to handle tax risks in a proactivemanner by looking at the topic through the lens of tax controversy and adopting a forward-looking view to anticipate tax risks.With lessons learned fromrecent taxdisputes – be it from own experience or leveraging on cases of other taxpayers - where tax risks materialise into a controversy with the tax authorities, the tax function willbebetterequippedtoidentify,assessandrespond torealtaxrisks.Taxprofessionalsalsoneedtofindthe righttoolandtonetocommunicatetaxriskstothesen- iormanagementwhowill beultimatelyheldrespon- siblewhentaxriskscrystalise.Thismaybedonewith tax risk scorecards. What are tax risks? Everyone has to pay taxes. Companies book tax pro- visionseveryyear.Taxrisk,however,isamultifaceted concept that extends beyond the simple obligationof paying taxes. First and foremost, tax risks are the fi- nancial losses due to unexpected tax payments. Ad- ditionally, tax risks also includemissedopportunities for tax benefits, reputational risks, compliance risks and,lastbutnotleast,personalliabilityrisksforsenior management. One of the primary financial risks is the potential for unexpected tax liabilities that exceed tax provisions. Thesecanariseforvariousreasonsrangingfromcler- ical mistakes over errors in tax calculations, changes intaxlawsorunfavorabletaxaudits.Suchunexpected payments can significantly impact a company’s net incomeandcashflow.Failuretocomplywithtaxreg- ulations can also result inpenalties, fines and interest charges.Forinstance,ifaLuxembourgcompanydoes not file its tax returns on time, itmay be subject to es- timatedtaxation,whichoftenincludesamark-upand can significantly exceed the real tax liability. Companies also run the risk of missing out on tax credits,taxexemptions,taxreliefsorreducedtaxrates. Toproactivelymanage the riskofmissed taxoppor- tunities companies should carry out regular health checks and update their tax position with regard to changes in legislation, case-lawandnewadministra- tive guidance. Ontopofthefinancialrisk,itisoftenthe reputational risk thatwillconcerntaxpayers.Taxesareseenbythe public as a company´s contribution to society. Nega- tive publicity regarding tax practices could lead to public pressure and damage relationships with vari- ousstakeholders,includingcustomersandsharehold- ers. It could result in investigations by tax authorities and regulators. Therefore, investors factor taxes into theirconsiderationswhenassessingthesustainability reporting of a company. Poor tax practices can ad- versely affect a company’s corporate social responsi- bilityprofile.Typically,itwouldbetheChiefFinancial Officer(CFO)whoisultimatelyresponsiblefortaxes. The tax functionneeds tomanage these risks inorder to protect theCFOand the seniormanagement from personal liability risks, and the company fromfinan- cial and reputational risks. Tax compliance remains a key area of risk: If compa- niesfailtoprepareandfiletaxreturns,reportsandin- formationinatimely,accurateandcompletemanner, compliance risks manifest themselves in additional taxpayments,penalties,finesandinterestcharges.In- completeorinaccuratedocumentationcantriggertax audits, leading to further scrutiny and potential dis- putes with tax authorities. For corporate income tax, business tax andwealth tax, these tax audits may be carried out in Luxembourg over a period of 10 years aftertheendofthetaxyear,ifreturnswereincomplete or inaccurate. Building on the preliminary works of the OECD, many countries encourage companies to set up internal controls to assure the accuracy and completenessoftaxreturns,forexample,thetaxcom- pliancemanagementsystemsinGermanyandthetax control frameworks in theNetherlands and theUK. Thetaxfunctionshouldalsobeawarethattherecould be blind spots in the tax operations . Too often, the main cause of errors is a lack of communication be- tween the tax and other departments. For example, decisionsmadebytheprocurementormarketingde- partments without considering tax implications can result in compliance issues. At best, tax riskmanage- mentshouldbeproactiveandstartmuchearlierinthe process: when fund managers make a new invest- ment, when Research and Development (R&D) works on a newproduct, when treasury signs a debt waiver of a shareholder loan, when the legal depart- ment drafts newterms andconditions,whenhuman resources introduce teleworking, etc. It is amisconception to think that tax risks only origi- nate in the tax or finance department. The technical interpretationoftaxlawsisseldomasourceoftaxrisk in itself. Tax risks arise throughout the organisation and can be triggered by changes in internal factors (such as changes in business models, an overhaul of IT systems, acquisitions/disposals of businesses, sig- nificant reorganisations) or external factors (such as changes in legislation or accounting standards). The tax function should be strategically involved and in- tegratedintootherbusinessoperationsandshoulden- sure that potential tax risks are considered at the earliest stages of decision-making. How tomanage tax risks? Ingeneral,taxriskmanagementcanbebrokendown intoidentifying,assessing,answeringandcommuni- cating tax risks. To identify tax risks, the first step is to register and track the inherent and an- ticipatedrisksinthetaxriskscorecard. As explained above, the different componentsoftaxrisksarefinancial risks,missedopportunities, reputa- tional risks, compliance risks, the risk of blind spots in the tax pro- cessandpersonalliabilityrisksfor senior management. Depending on the company’s business envi- ronment, the risk factor of po- litical changes (e.g., upcoming elections, armed conflicts, trade wars)may be included. To assess tax risks, the po- tential likelihood and the financialimpactareratedon a scale and displayed in the scorecard.Thisallowsveryhightax risks tobeprioritised. Lower risks canbe acceptedas not all risks can be addressed due to time and re- source constraints. In a third step and in response to identified and as- sessed tax risk, appropriate actions should be agreed tomitigate,allocate,controlandmonitorrisks.Thetax riskscorecardshouldthereforeincludealistofpoten- tial action items with tasks and responsibilities. For thispurpose, aResponsible,Accountable, Consulted, and Informed (RACI) matrix is a useful tool used to definerolesandresponsibilitiesintofourparticipatory types which are then assigned for the duration of a project or process. Risk mitigation may involve dis- closing risks to the tax authorities (e.g., by filing amendedreturns).Taxrisksmayalsobeallocatedand shifted to counterparties by including tax clauses in legaldocumentation.Theriskofpersonalliabilitymay be covered to some extent by Directors and Officers (D&O) insurance. If restructuring is not feasible, un- certaintaxpositionscouldbecoveredbytaxopinions fromadvisors in a defence file.A residual tax risk re- mains if neither the likelihood of occurrence nor the potentialimpactcanbereducedtoanacceptablelevel. In practice, scorecards have proven to be an effective technique for the management of tax risks. Tax risk scorecardshelpthetaxfunctiontomeasure,trackand communicate tax risk. This widely accepted tech- nique makes tax risks more accessible and visible to non-tax professionals (i.e., virtually everyone outside thetaxdepartment).Itcanhelptofurtherintegratethe tax function into thewider organisation, wheremost tax risks are likely to be located. Scorecards also im- prove the reporting of tax issues to senior manage- ment, especially when being used as an executive summary of tax risks for a single entity, a portfolio of investments or groupof companies. Tax functions are faced not only with changes in tax legislation, but alsowithpersonnel changes in the tax department.Iftaxrisksareproperlydocumentedand trackedinascorecard,itwillhelpwiththeonboarding of new personnel and avoid knowledge gaps. Em- beddingtaxriskscorecardsintothehandoverprocess allowsforafreshstartandaclearcut,sothatnewteam members do not have to take responsibility for the legacy issues of outgoing personnel. This will be equally important for new managers and directors who are about to take a seat on the board or for liq- uidatorswhowillbeappointedtowindupabusiness. Both should have a particular interest in identifying and documenting tax risks created during their pre- decessors’ tenure. Awell-designedtaxriskscorecardwillfinallyprepare companiesforduediligenceprocessesbypotentialin- vestors or buyers and for audits by tax authorities. How to enhance tax riskmanagement with insights fromtax controversy experts? Every time a company is involved in a large com- mercial transaction, the working assumption shouldbe that the transactionwill be auditedby tax authorities in the future and may potentially end up in court proceedings. Here, tax controversy experts candrawon their les- sons learned frompast disputes to help companies avoid similar pitfalls. By analysing recent tax dis- putes of other taxpayers, they can identify common issues anddevelop strategies tomitigate these com- mon risks for companies. This forward-looking viewwithdispute lens allows the tax function to be more prepared for future challenges. For example, experience from many tax disputes shows that cases are often won based on the strength of the evidence. Tax controversy experts can guide companies in maintaining comprehen- sive records of business decisions, contracts, email correspondence and board minutes. For instance, documenting the commercial reasons for transac- tions can help counter claims of wholly artificial arrangements by foreign tax authorities. Or, docu- menting the fact that Luxembourg boardmembers were involved in the finding and making of deci- sions and that these were actually taken in Luxem- bourg can refute the accusation of foreign authorities that the place of effective management is elsewhere. Byunderstanding current audit trends andwhat type of documentation tax authorities are likely to require when reviewing a case, tax contro- versyexperts canhelpcompanies prepare their case for future disputes and be audit ready. In addition, regular analysis of recent court decisions in taxmatters canprovide practical examples of how taxdisputeshavebeenresolved.Often,courtdecisions clarifyambiguitiesintaxlegislation,setnewlegalstan- dardsandhighlightthepositionsoftaxauthoritieson various issues. By closely monitoring and analysing thesedecisions,companiescangaininsightsintohow similar cases might be treated in the future, allowing them to adjust their tax practices accordingly. Com- paniescanusethisinformationtopinpointsimilarrisk areas within their own operations and take preemp- tivemeasures to address them, enhance documenta- tionpractices andmake informed strategic decisions. Beyond this specific case management, tax contro- versy experts are well-placed to develop processes that allow companies to stay ahead of potential tax risks. For that purpose, tax risk scorecards shouldbe developed and updated to register and track inher- ent and anticipated risks. Leveraging on their expe- rience from handling past disputes and on their knowledge of the latest court decisions, tax contro- versy experts can accurately rate the potential likeli- hoodandfinancial impact of these risks. Itwill allow companies to prioritise high-risk areas and allocate resources accordingly. Conclusion Tax riskmanagement requires a proactive and com- prehensive approach. By leveraging the expertise of taxcontroversyexpertsandutilisingtoolsliketaxrisk scorecards andRACImatrixes, companies canbetter identify, assess and respond to tax risks. In an envi- ronment of increasing regulatory scrutiny and com- plex tax laws, a well-designed tax risk management canprotectcompaniesfromfinancialandreputational damages while enhancing their overall tax position. Adopting a proactive approach to tax risk manage- ment by putting on the dispute lens will put the tax functionone step ahead. Tax risk management through the lens of tax controversy L eministre des Finances, GillesRoth, a participé aux réunions de l'Eurogroupe et duConseil «Affaires économiques et financières» (Ecofin), qui se sont tenues àBruxelles les 9 et 10 décem- bre. Dans le cadre de l'Eurogroupe, lesministres ont euundialogue économique productif avec lami- nistre britannique des Finances, Rachel Reeves, afind'approfondir les relations commerciales euro- péennes avec Londres. Gilles Roth a commenté : «J'ai eudes dis- cussions fructueuses avec la chancelière britannique Rachel Reeves. Notre échangesurlesrelationsentrel'Unioneu- ropéenne et le Royaume-Uni a été très constructif. LeLuxembourg resteattaché à un partenariat étroit avec Londres. Nouspartageonsdesvaleurs,desconvic- tions et des intérêts communs.» Importance d'une coordination étroite des politiques budgétaires L'Eurogroupes'estréunipourexaminerla situationbudgétairedesÉtatsmembreset desimplicationsmacroéconomiquespour l'unionmonétaire. Dans un contexte éco- nomiquemondialenévolutionrapide,les ministres des Finances ont souligné l'im- portance d'une coordination étroite des politiquesbudgétairesafindemaintenirla stabilité et de promouvoir une croissance durable dans la zone euro. Les discussions ont été enrichies par une sessiond'échangeavecdes représentants du Fondsmonétaire international (FMI), qui ont présenté les conclusions prélimi- naires de leur évaluation annuelle de la zone euro, connue sous le nomde «Arti- cle IV». Cette évaluation offre une pers- pective indépendante sur les perfor- mances économiques de la zone euro et sur les politiques à adopter pour relever les défis à venir. LeConseilEcofins'estpenché,quantàlui, surlepaquetderéformesdel'uniondoua- nière, sur la révision de la directive sur la taxation de l'énergie ainsi que sur la mise enœuvre du cadre budgétaire européen. Pourconclure,lesvingt-septministresont fait le point sur l'impact économique et fi- nancierdelaguerred'agressiondelaRus- sie contre l'Ukraine. En marge des réunions, le ministre des Finances a ren- contrésonhomologueallemand,JörgKu- kies, pour échanger e.a. sur la questionde l'imposition des heures supplémentaires des travailleurs frontaliers. Source :ministèredesFinances Gilles Roth aux réunions de l'Eurogroupe et du Conseil Ecofin à Bruxelles : «Le dialogue entre l'Union européenne et le Royaume-Uni reste vital » ©Conseilde l'UE