L'Oréal - 2018 Registration Document

Corporate Governance RISK FACTORS AND CONTROL ENVIRONMENT

FINANCIAL AND MARKET RISKS \ RISKS WITH REGARD TO ASSETS FINANCING EMPLOYEE BENEFIT COMMITMENTS Risk identification Risk management

Pursuant to the provisions of the Group’s Internal Charter on the Assets Financing Employee Benefit Commitments, the allocation by category of assets is subject to limits aimed in particular at reducing volatility and correlation risks between these different asset categories. A Supervisory Committee for the pension and employee benefit schemes offered to the Group’s employees ensures that these principles are implemented and monitored, as described in the “Employee benefit and pension schemes section” in the “Social information” section (see chapter 3). Moreover, the Group chooses insurers and custodians with robust ratings from the three main specialist rating agencies.

By nature, assets used to finance employee benefit commitments are exposed to fluctuations on the markets in which such assets are invested. A sharp, prolonged downturn in the financial markets may have an impact on the value of the portfolios created (see note 5.4. “Post-employment benefits, termination benefits and other long-term employee benefits” of the Consolidated Financial Statements). FINANCIAL AND MARKET RISKS \ RISK RELATING TO TAX REGULATIONS Risk identification Due its global presence, the Group is subject to different tax regulations. The Group is exposed to risks arising from the multiplication and complexity of tax standards and changes in tax regulations or their interpretation. An increase in existing taxes, the introduction of new taxes, or double taxation concerning in particular corporate income tax, customs duties, import taxes, the repatriation of dividends or social levies, could have an adverse impact on the Company’s results. The tax authorities in the countries in which the Group is present carry out tax audits that may lead to tax adjustments if there is a disagreement over the interpretation of the regulations. These audits may become disputes, and in certain countries, be subject to media coverage that may affect the Group’s reputation. FINANCIAL AND MARKET RISKS \ CORE COMMODITY RISK Risk identification The production of cosmetics depends on the purchase of raw materials whose prices vary. These raw materials or components are used in the manufacture of products or in their packaging. The main core raw materials are polyethylene, polypropylene, aluminium and vegetable oils and their by-products. An exceptionally sharp increase in the price of these raw materials or energy prices on the world market could have a direct effect on the manufacturing cost of the cosmetics. However, it is estimated that the impact of this rise on gross margin would remain limited.

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Risk management

The Group is located in countries where it exercises a real operational and commercial activity. If applicable, the Group’s presence in certain so-called “tax haven” countries is justified for operational reasons and the development of its activity and not for exclusively tax-based purposes. The Tax Department and the Finance Departments, assisted where applicable by external advisors, monitor the changes in tax regulations to ensure that the Group complies with these regulations. An international tax monitoring system has been set up. A Tax Charter, prepared in 2018, is currently being rolled out in the Group. This Charter covers the principles of the Group’s tax policy. L’Oréal ensures that the transactions between Group companies are carried out in compliance with the principle of full competition as defined by the OECD. To meet its declarative obligations with respect to the OECD (country by country reporting), the Group has installed tools allowing it to remotely transmit the information to the French tax authorities and exchange with foreign administrations. The Group has also developed cooperative compliance programmes with certain tax authorities allowing it to limit tax risks. Lastly, in an evolving international tax environment, the positions taken by the Group may be questioned and be subject to tax audits by the local tax authorities. In the event of a dispute or a difference in interpretation with the tax authorities, L’Oréal may legitimately defend its position by using the means of recourse available for its defence. A regular review of tax risks carried out by the Group’s Tax Department in contact with the local financial teams enables the risks to be assessed, resulting, if applicable, to the recognition of a tax provision. The main tax risks are reported to the General Management and presented to the Audit Committee.

Risk management

In order to anticipate the impact of these fluctuations and as a preventive measure, L’Oréal negotiates price indices with its main suppliers of raw materials and packaging items. Also in order to offset market volatility, L’Oréal rolls out ongoing efforts in terms of cost-cutting projects and actions to improve industrial productivity. Pooled responsibility for purchases has made it possible to reinforce these measures.

REGISTRATION DOCUMENT / L'ORÉAL 2018

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