EU Approves Rules to Force Advisers to Report Abusive Tax Schemes

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By Joe Kirwin

European Union finance ministers have formally approved controversial rules that will require accountants, bankers, lawyers, and other tax professionals to report certain aggressive tax planning arrangements to national revenue authorities.

The tax intermediary reporting legislation, which will take effect as of July of 2020, is designed to prevent tax avoidance schemes sold to companies and individuals.

The legislation contains a range of criteria or “hallmarks” which stipulate when a planning arrangement must be reported. These cover issues relating to including cross-border losses to reduce tax liability, and the use of special preferential tax regimes or arrangements in countries with minimal tax rates or standards. The hallmarks were a contentious element during the negotiations process.

The rules come as an amendment to the EU Directive for Administrative Cooperation and requires tax authorities in each EU member nation to share the information reported by tax professionals.

Retroactive Reporting Concerns

The 2020 implementation data means tax professions will have to begin reporting tax schemes on a quarterly basis, but this has triggered significant concerns and confusion among tax planners according to Stefaan De Baets, a PwC transfer pricing expert.

“Right now, there is a legal vacuum,” De Baets told Bloomberg Tax May 25. “The problem is that the hallmarks are very general and subject to significant interpretation. The situation is very worrying because there are retroactive reporting requirements.”

“The legislation takes an approach that is like trying to kill a mosquito with a cannon. This is especially the case with hallmarks concerning transfer pricing,” he said.

The European Commission insists the final terms are in line with the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 12, which deals with mandatory disclosure—by either the taxpayer or tax intermediary—of aggressive tax planning schemes.

The final agreement on the latest rules concluded after eight months of negotiations, as member states bridged differences over the hallmarks concerning deductible cross-border payments to foreign countries and transfer pricing.

Extended Legal Professional Privilege

The new legislation also includes terms that will, at the insistence of Germany, extend “legal professional privilege” reporting exemptions to not only lawyers but also to accountants and tax advisers. Through months of negotiations EU negotiators struggled to find terms that matched the variety of legal profession privilege terms in the 28 EU member states.

However, the compromise agreement on legal professional privilege includes conditions designed to ensure the exemption doesn’t become a loophole. One of these conditions will require a client to notify tax authorities of an eligible tax arrangement if the legal professional privilege exemption is applied.

Blacklist Reduced to Seven

In a separate decision that is part of an overall effort to reduce tax avoidance and evasion, EU finance ministers agreed to remove the Bahamas and Saint Kitts and Nevis from the EU tax haven blacklist.

Both the Bahamas and Saint Kitts and Nevis were added to the EU blacklist in March because of unclear commitments to sign up to the OECD Common Reporting Standard and conform to fair taxation and anti-BEPS reforms.

The changes come as the EU is preparing additional tax haven blacklist criteria for 2019 that will include company beneficial ownership transparency rules. It is also working on a list of sanctions, including potential withholding taxes on payments between parent companies and their subsidiaries, if either one is based in an EU blacklisted tax haven.

Previously, the Caribbean nations were given an exemption from the EU’s initial tax haven blacklist announced in December because of hurricane damage that swept across the region earlier in 2017.

American Samoa, Guam, Namibia, Palau, Samoa, Trinidad and Tobago, and the U.S. Virgin Islands remain on the EU tax haven blacklist.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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