AGEFI Luxembourg - avril 2024

Avril 2024 17 AGEFI Luxembourg Fiscalité / Economie Continuedon left page As part of this effort, strike force cells stationed in twelveAmerican cities are using all-source informa- tion to pursue investigations and impose criminal and/or administrative penalties as appropriate. While this list is not exclusive, disruptive technology may include: - Advanced Semiconductors: logic/artificial intelli- gence (AI) chips, associated fabrication equipment, electronicdesignautomation(EDA)software/technol- ogy, and novel materials for production below 14 nanometers (nm) - Supercomputer Computing Hardware: including graphics processing units (GPUs), and software (in- cluding formodeling/simulations) - QuantumTechnologies -Hypersonic Technologies - Military Bioscience/Technology (e.g., human per- formance enhancements like brain computer inter- faces) -AdvancedAerospace Technology 4 –Challenges facedby banks Despite their best efforts, banks encounter several challengesinfulfillingtheirobligationsconcerningex- portcontrolcompliance.Thesechallengesincludethe following: 4.1. Complex regulatory landscape Theever-evolvingnatureofexportcontrolregulations posesasignificantchallengeforbanks,requiringthem to constantly adapt their compliance frameworks to alignwithnewregulatory requirements and interna- tional standards. 4.2. Resource constraints Implementing robust compliance programs requires substantial financial and human resources, which may pose challenges for smaller banks with limited budgets and staffing capabilities. 4.3. Technological limitations Theeffectivenessofbanks’complianceeffortsheavily relies on the sophistication of their technological in- frastructure. However, many banks struggle with outdated systems and legacy processes, hindering their ability to effectivelymonitor andmitigate com- pliance risks. 4.4. Cross-border transactions The proliferation of cross-border transactions further complicates banks’ compliance efforts, as they must navigatedisparateregulatoryregimesandcoordinate with foreign counterparts to ensure adherence to ex- port control regulations. 4.5. Reliance on client declarations To face the new restrictions, the primary reaction of financial institutions seemed to rely on declarations providedbytheirclients.Thisapproachcanneverthe- lessresultintheliabilityofthefinancialinstitutionnot being discharged should economic sanctions restric- tions be breached. The EU Commission is requiring banks to exercise due diligence because they “cannot rely on the sole declaration of their customer that the goods and technology concerned are not covered by restrictive measures” (48) . The reason for that require- ment resides in that, “while it is true that primary re- sponsibility for the classification of goods and technology lieswith those responsible for sending or receivingsuchitems,theprohibitiontoprovidefinan- cial assistance for the goods subject to a ban is (…) in- cumbent uponbanks”. However, financial institutions generally do not have the required internal expertise in qualifying tangible/intangible items, software or technologies as being export controlled. PART 2 - Continue the reading inAGEFI Luxembourg May 2024withthefollowingchapter: 5.Applyingarisk-basedapproachtoTradeFinance 1)RespectUsisaLuxembourgstart-up,graduatedfromFit4Start(9 th ed., 2020)inthespacevertical.Ithasbuiltadigitalone-stop-shopdigitalplat- formforexportcontrolcompliance (www.respectus.eu) ,intheframeofthe Luxembourg national space programme LuxIMPULSE (2021-2023) throughanESAcontract.ThesoftwarehasbeenvalidatedbytheEuropean SpaceAgency inAugust2023.Webwww.respectus.space 2) Part 2will be published in theMay 2024 edition ofAGEFI. The com- plete eBook “Export Control Compliance: The Imperative for Banks and Financial Services Providers”, may be downloaded under the link https://respectus.space/knowledge-hub/ 3)TheWhiteHouse,BackgroundPressCallonUpcomingActiontoCon- tinue Holding Russia Accountable. 21 December 2023, https://lc.cx/E4WNtM 4) See FinCEN&BIS JointAlert, FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Urge Increased Vigilance for Potential Russian and Belarusian Export Control EvasionAttempts, 28 June 2022, https://lc.cx/YAS-bc; FinCEN& BIS JointAlert, Supple- mentalAlert: FinCEN and the U.S. Department of Commerce’s Bureau ofIndustryandSecurityUrgeContinuedVigilanceforPotentialRussian Export Control Evasion Attempts, 19 May 2023, https://lc.cx/nnENlz ; FinCEN&BIS JointAlert, FinCEN and the U.S. Department of Com- merce’sBureauofIndustryandSecurityAnnounceNewReportingKey TermandHighlightRedFlagsRelatingtoGlobalEvasionofU.S.Export Controls,6November2023 ,https://lc.cx/LoXPqc. 5)Atermdefinedbroadlytoinclude“anyforeignentitythatisengagedin thebusinessofacceptingdeposits;making,granting,transferring,holding, or brokering loans or credits; purchasing or selling foreign exchange, se- curities,futuresoroptions;orprocuringpurchasersandsellersthereof,as principaloragent.Itincludesdepositoryinstitutions;banks;savingsbanks; money services businesses; operators of credit card systems; trust compa- nies; insurancecompanies;securitiesbrokersanddealers; futuresandop- tions brokers and dealers; forward contract and foreign exchange merchants; securities and commodities exchanges; clearing corporations; investmentcompanies;employeebenefitplans;dealersinpreciousmetals, stones, or jewels; and holding companies, affiliates, or subsidiaries of any ofthe foregoing.”EO1402411(f),asamendedbyEO14114. 6) See: “Commission welcomes political agreement on new rules crimi- nalizingtheviolationofEUsanctions”,Pressrelease,12December2023, https://lc.cx/_KG_6E 7)EuropeanCommission,GuidanceforEUoperators:Implementingen- hanced due diligence to shield against Russia sanctions circumvention, December2023 ,https://lc.cx/mjRvlL 8)TheGECCincludesIceland,Liechtenstein,Norway,Switzerland,Aus- tralia,Canada,the27MemberStatesoftheEuropeanUnion(EU),Japan, South Korea, Taiwan, New Zealand, the United States, and the United Kingdom(UK).Thesecountriesarealsolistedinsupplement3topart746 of the ExportAdministration Regulations (EAR) and have committed to implementingsubstantiallysimilarexportcontrolsonRussiaandBelarus. 9) See White House, “Executive Order on Prohibiting Certain Imports, Exports,andNewInvestmentwithRespecttoContinuedRussianFeder- ationAggression,”(11March2022) 10) See BIS Press Release, “Commerce Restricts the Export of Luxury Goods to Russia and Belarus and to Russian and Belarusian Oligarchs andMalignActors in Latest Response toAggressionAgainst Ukraine,” (11March2022). 11)SeeBISPressRelease,“CommerceImposesSweepingExportRestric- tions on Belarus for Enabling Russia’s Further Invasion of Ukraine,” (2 March2022) 12) See BIS Press Release, “Commerce Imposes Additional Export Re- strictions in Response to Russia’s Brutal War onUkraine” (24 February 2023). 13)Accessibleunderthe linkhttps://lc.cx/k5x7e9 14)Supplement4toPart744oftheEAR 15)Supplement6toPart744oftheEAR 16)Supplement7toPart744oftheEAR 17)Accessibleunderthe linkwww.trade.gov/consolidated-screening-list 18) Regulation (EU) 2021/821 of the European Parliament and of the Council of 20May 2021 setting up a Union regime for the control of ex- ports,brokering,technicalassistance,transitandtransferofdual-useitems (recast) ,http://data.europa.eu/eli/reg/2021/821/2023-12-16 19) Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictivemeasuresinviewofRussia’sactionsdestabilisingthesituation inUkraine ,http://data.europa.eu/eli/reg/2014/833/2024-02-24 20)as listed inAnnexItoEUDual-UseRegulation2021/821 21)as listed inAnnexIItoRegulation(EU)833/2014 22)as listed inAnnexVIItoRegulation(EU)833/2014 23)as listed inAnnexXtoRegulation(EU)833/2014 24)as listed inAnnexXItoRegulation(EU)833/2014 25)as listed inAnnexXVItoRegulation(EU)833/2014 26)as listed inAnnexXVIIItoRegulation(EU)833/2014 27)as listed inAnnexXXtoRegulation(EU)833/2014 28)as listed inAnnexXXIIItoRegulation(EU)833/2014 29)aslistedinAnnexItoRegulation(EU)No258/2012oftheEuropean ParliamentandoftheCouncilof14March2012implementingArticle10 of the United Nations’ Protocol against the illicit manufacturing of and traffickinginfirearms,theirpartsandcomponentsandammunition,sup- plementing the United Nations Convention against Transnational Or- ganised Crime (UN Firearms Protocol), and establishing export authorisation, and import and transit measures for firearms, their parts andcomponentsandammunition 30)as listed inAnnexXXXVtoRegulation(EU)833/2014 31)Art. 2(7) of EUDual-Use Regulation 2021/821. See alsoArt. 2.k. of Regulation(EU)2019/125oftheEuropeanParliamentandoftheCouncil of16January2019concerningtradeincertaingoodswhichcouldbeused forcapitalpunishment,tortureorothercruel,inhumanordegradingtreat- mentorpunishment 32) Regulation 833/2014, Art. 1(d)). See also: Council Regulation (EU) 692/2014 of 23 June 2014 concerning restrictions on the import into the UnionofgoodsoriginatinginCrimeorSevastopol,inresponsetotheillegal annexationofCrimeaandSevastopol,Art.1(e);CouncilRegulation(EU) 2022/263of23February2022concerningrestrictivemeasuresinresponse to the recognition of the non-government controlled areas of the Donetsk andLuhanskoblastsofUkraineandtheorderingofRussianarmedforces intothoseareas,Art.1(a).ThesameisthecaseforotherEUsanctionsreg- ulations, see for example, Council Regulation (EC) 1183/2005 of 18 July 2005imposingcertainspecificrestrictivemeasuresdirectedagainstpersons actinginviolationofthearmsembargowithregardtotheDemocraticRe- publicofCongo,Art.1(i);CouncilRegulation(EU)224/2014of10March 2014concerningrestrictivemeasuresinviewofthesituationintheCentral AfricanRepublic,Art.1.a.;CouncilRegulation(EU)401/2013of2May 2013concerningrestrictivemeasuresinrespectofMyanmar/Burma,Art. 1.i.. 33) Council Regulation (EU) 833/2014,Art. 1(o)). Such financing or fi- nancialassistanceis,forexample,prohibitedwhentheyarerelatedtogoods andtechnologylistedintheEUCommonMilitaryList(CouncilRegula- tion(EU)833/2014,Art.4.1.b.)ordual-useitems(Art.2.2.b.)thatareex- portedtoRussia. 34)SeeTreasuryPressRelease,“FACTSHEET:DisruptingandDegrad- ing–OneYearofU.S.SanctionsonRussiaandItsEnablers”(24February 2023). See also Department of Justice (DOJ) Press Release, “FACT SHEET: Justice Department Efforts in Response to Russia’s February 2022 Invasion of Ukraine” (24 February 2023) and U.S. Department of StatePressRelease,“TheImpactofSanctionsandExportControlsonthe RussianFederation”(20October2022).SeealsoBISPressRelease,“Re- marksbyAssistantSecretaryTheaD.RozmanKendlertotheAssociation ofWomen inInternationalTrade(WIIT)”(2March2023). 35)SeeDOJPressRelease,“FederalCourtOrdersForfeitureof$826Kin Funds Used inAttempt to Export Dual-Use High Precision Jig Grinder to Russia” (5 April 2023); BIS Press Release, “Microsoft to Pay Over $3.3M in Total Combined Civil Penalties to BIS and OFAC to Resolve AllegedandApparentViolationsofU.S.ExportControlsandSanctions” (6April2023);U.SAttorney’sOffice,EasternDistrictofNewYorkPress Release,“UnitedStatesObtainsWarrant forSeizureofAirplaneOwned by RussianOil Company Valued at Over $25Million” (8March 2023); BISPressReleases,“BISTakesActionAgainstRussianNationalandRe- latedCompanyforSendingControlledCounterintelligenceItemstoRussia andNorthKorea”(24February2023),and“CommerceCutsOffRussia Procurement Network Evading Export Controls” (December 2022 BIS EnforcementAction)(13December2022). 36)ChallengesofExportControlsEnforcement–HowRussiacontinues toimportcomponentsforitsmilitaryproduction,byOlenaBilousova,Ben- jaminHilgenstock,ElinaRibakova,NataliiaShapoval,AnnaVlasyukand VladyslavVlasiuk,January2024 ,https://lc.cx/pHuHlr 37)SeeDOJPressRelease,“DepartmentsofJustice,CommerceandTreas- ury Issue Joint Compliance Note on Russia Related Sanctions Evasion andExportControls”(2March2023). 38)SeeOFAC,“SpeciallyDesignatedNationalsandBlockedPersonsList (SDN)HumanReadableLists” 39)SeeDecember2022BISEnforcementAction 40) For a full list of items that now require a license if destined for Russia or Belarus, see 15 CFR Part 746, Supp. Nos. 2, 4, and 5, and Part 774, Supp.No.1,toEAR. 41) Economically Critical Goods List (Version of 18 October 2023): https://lc.cx/1a0GJ6. The complete list is also published in the eBook “Export Control Compli- ance: The Imperative for Banks and Financial Services Providers”, that maybedownloadedunderth elinkhttps://respectus.space/knowledge-hub/ 42)On14September2023,theU.S.BISpublishedatieredlistof45“com- monhigh-priorityitems”byHSCodethatconsolidatedandexpandedon previous notices. Two weeks later, the United States, Australia, Canada, NewZealand,andtheUnitedKingdom(collectivelythe“ExportEnforce- mentFive”or“E5”)releaseda jointguidancenoticeprioritizingthenew tiered list forexportenforcement inallfivecountries. 43) List of Common High Priority Items (Version of February 2024) : https://lc.cx/s34d5D. 44) The complete list is published in the eBook “Export Control Compli- ance: The Imperative for Banks and Financial Services Providers”, that maybedownloadedunderth elinkhttps://respectus.space/knowledge-hub/ 45)ChallengesofExportControlsEnforcement–HowRussiacontinues toimportcomponentsforitsmilitaryproduction,byOlenaBilousova,Ben- jaminHilgenstock,ElinaRibakova,NataliiaShapoval,AnnaVlasyukand VladyslavVlasiuk,January2024 ,https://lc.cx/BAtFz5 46) The complete list is published in the eBook “Export Control Compli- ance: The Imperative for Banks and Financial Services Providers”, that maybedownloadedunderth elinkhttps://respectus.space/knowledge-hub/ 47) See DOJ Press Release, “Justice and Commerce Departments An- nounce Creation of Disruptive Technology Strike Force” (Feb. 16, 2023); see also DOJ Press Release, “Justice DepartmentAnnounces Five Cases asPartofRecentlyLaunchedDisruptiveTechnologyStrikeForce”(May 16,2023). 48) Commission Guidance Note on the implementation of certain provi- sionsofRegulation(EU)No833/2014,CommissionNoticeof25.8.2017, C(2017)5738final I n the dynamic global financial envi- ronment, navigating the complexi- ties of tax regulations such as the Foreign Account Tax Compliance Act (FATCA), Common Reporting Stan- dard (CRS), Directive on Administra- tive Cooperation 6, 7 and 8 (DAC6, DAC7 and DAC8), and the Central Electronic System of Payment informa- tion (CESOP) present considerable challenges. Challenge #1 – Evolving regulations Since the entry into force of DAC7, each Luxembourg finan- cial institution (FI) is required to notify each reportable individual in the scope of CRS that their personal and financial information will be gathered and transmitted in accordancewith the law. In this con- text, personal information refers to individual data such as name, address, jurisdiction of tax residency/residencies, and tax identification num- ber, while financial information refers to the total gross amount paid or credited, and/or the value of the debt or equity position within the financial in- stitution at the end of the calendar year or another relevant reference period. ReportingFIsmust notify their individual clients and thecontrollingpersonsofpassivenon-financialentity clientssubjecttoreportingunderCRSabouttheirper- sonal and financial information which will be re- ported to the Luxembourg tax authority. This notification should be performed every year prior to the exchange of informationwith the authorities. In addition, the FI must provide those individuals withdetails about howto request the data controller, and also provide access to the information within a reasonabletimeframe.Ifrequired,theywillalsoallow theindividualstoexercisetheirdataprotectionrights. Thisrequirementmustbemetbeforeanyinformation is sharedwith the Luxembourg tax authority. During the year 2023, the following five jurisdictions were added to the list of reportable jurisdictions: Ja- maica,Moldova,Montenegro,Thailand,andUganda. Other participating jurisdictions, such as Kenya, Rwanda, Ukraine,mayalsobe added to the list of re- portable jurisdictions. In this evolving contextwe recommend that: - Thenotificationprocess be integratedwithin the ex- isting reportingprocess. - Financial institutions remain informed about any modifications in reporting requirements and update theirsystemsandprocessesforreportingpreparation accordingly. Challenge #2 –Data quality Tomeetallthenecessarydatastandardsandlegalre- quirements,Luxembourgfinancialinstitutionscollect, maintain,andprocessdata.ItiscriticalforFIstomain- tainahighlevelofdataaccuracy,andforthatpurpose, internal and external checksmust be performed. To support FIs in their duties, the OECD, the IRS and the European Commission websites provide the opportunity to checkplausibilityof mandatory data, such as foreign tax numbers, addresses, GIIN, andVAT numbers, etc. Storing and processing inaccurate datamay lead to incorrect reporting andexposefinancial institutions and their clients to tax investigations and penalties. Data is gold and we recom- mend that: - A full data check be carried out from data collection to report submission. - Financial institu- tions continually analyze and clean their data leading up to annual filing. Challenge #3 – Complexity It is important to mention that the (Automatic Ex- change of Information (AEOI) requirements are closely related to Anti-Money Laundering (AML) rules, theAnti-TaxAvoidanceDirective 2 (ATAD2), andtheGeneralDataProtectionRegulation(GDPR). In addition to the regulations mentioned earlier, DAC8, a newdirective, was issued inOctober 2023. This Directive focuses on imposing transaction re- portingobligationsoncrypto-assetserviceproviders, butitalsoextendsitsreachtoexistingdirectives,par- ticularly DAC2 (CRS) and DAC6 (Mandatory Dis- closure Regime). Acritical aspect of simplifying this complexity is en- suring data accuracy and integrity. Tax topics cannot behandled in silos andwe recom- mend that: - Financial institutions develop and execute a com- prehensive strategy that addresses these intercon- nected aspects of global finance. -Theycontinuouslyimprovedatasecuritymeasures tomaintain compliance. Challenge #4 –Governance Policies and procedures must be well documented, andFIsmust remain informedabout filingdeadlines andchanges to reporting requirements andschemes. FIsmust also be prepared to respond to various type of inquiries from tax authorities regarding data ex- changed,governanceandcomplianceprograms,and evidence onproper taxdatamanagement. Based on the statistics provided by the tax authority ( Administration des contributions directes (ACD)), the penaltiesaremorethandoublingonayearlybasisand increased by 398%between 2021 and 2023. This con- firmstheincreasedscrutinyoftheauthoritiesandthat penaltiesforinstancesofnon-compliancearenotonly a possibility but a reality. These facts highlight the importance of investing the righteffortandmeanstoproperlymanageAEOIreg- ulations. The operational challenges to comply with tax regulations such as FATCA, the DACs, and CESOP shouldnot be underestimated. Regulations are transversal topics andmulti-discipli- naryteamsshouldbeinvolved.Variousstakeholders, suchasbanks,financialinstitutions,digitalplatforms, and crypto-asset service providers should remain pragmatic when putting in place procedures and defining their target operatingmodels. Duetohighlevelofspecializationofkeyplayers,out- sourcing of operational tax duties is also part of the possiblerobustapproachestotacklethesechallenges. Dan ZANDONA EY Luxembourg Partner, FSO Tax, Business Tax Services Patrice FRITSCH EY Luxembourg Partner, Tax Navigating through operational tax complexities Years ȱ 2021 ȱ 2022 ȱ 2023 ȱ Fines ȱ 108 ȱ 177 ȱ 216 ȱ 441 ȱ 000 ȱ 950 ȱ 000 ȱ 2 ȱ 197 ȱ 050 ȱ Penalties ȱ Ȭȱ +115% ȱ vs ȱ previous ȱ year ȱ +131% ȱ vs ȱ previous ȱ year ȱ ȱ