Media leaks, such as the release of the Panama Papers, have exposed how certain financial intermediaries, and other providers of tax advice, have helped taxpayers make use of aggressive cross-border tax planning arrangements to reduce tax and conceal money offshore. While some complex transactions and corporate structures have legitimate purposes, others do not and may even be illegal. The European Commission's proposal for new transparency rules for intermediaries designing and promoting cross-border tax planning arrangements, aims to tackle this by imposing the mandatory reporting of certain cross-border schemes to the tax authorities of EU member states and the automatic exchange of information between them. By increasing transparency and access to information at an early stage, tax authorities can identify a potentially aggressive arrangement before implementation, and act to prevent a loss of revenue.
Action 12 of the OECD/G20 BEPS Project recommends the introduction of mandatory disclosure requirements for aggressive tax planning schemes, but does not set any minimum standard to comply with. By proposing measures through EU legislation, the Commission is hoping to avoid divergence across EU member states in relation to cross-border tax planning arrangements. The proposal also intends to enhance the effectiveness of the common reporting standard (CRS) on financial account information, introduced in the EU through Council Directive (EU) 2014/107.
The Commission's proposal takes the form of a draft directive entitled "Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements". Amending the EU's directive on administrative cooperation in the field of taxation ("DAC"), this is the latest in a series of EU initiatives laying down the requirement for mandatory automatic exchange of information in tax matters. Published on June 21, 2017, the new reporting requirements are expected to take effect on January 1, 2019, following submission to the European Parliament for consultation and to the EU Council for adoption. Member states will need to adopt domestic rules satisfying the requirements of the directive by the end of 2018.
Under the proposed directive, an intermediary supplying a reportable cross-border arrangement bearing one or more specified characteristics, or "hallmarks", must disclose the scheme to the intermediary's tax authority within five working days, beginning on the day after the arrangement is made available to the taxpayer for implementation. The proposed directive uses a compilation of hallmarks which present a strong indication of tax avoidance, or abuse, to determine whether an arrangement is reportable, as "an endeavor to define the concept of aggressive tax planning would risk being an exercise in vain". The hallmarks comprise five categories; the first two of which also necessitate the satisfaction of a "main benefit" test. A cross-border arrangement is an arrangement in either more than one member state or a member state and a third country, meeting certain criteria.
The term "intermediary" is widely drawn and includes anyone designing, marketing, organizing or managing the implementation of the tax aspects of a reportable cross-border arrangement in the course of providing services relating to taxation (or providing material aid, assistance or advice). Additionally, an intermediary must be incorporated, tax resident, registered with a professional association or based in a member state. Intermediaries can include lawyers, accountants, tax advisors, banks, consulting firms and financial advisors.
The proposed directive shifts the reporting responsibility to the taxpayer using the reportable cross-border arrangement where an intermediary is not based in the EU or is bound by legal professional privilege. Likewise, where the taxpayer designs and implements the scheme in-house. In such cases, the reporting deadline is still within five working days, but beginning on the day after the arrangement is implemented, as taxpayers may not realize the nature of the arrangements at the time of inception. Provision is made for reporting where there is more than one intermediary involved in an arrangement and also when there are associated taxpayers using the same arrangement.
Information to be communicated by member states is laid out in the proposed directive and will need to be reflected in the information obtained from intermediaries by their own member states. It includes: identification of the intermediaries and taxpayers; details of the hallmarks giving rise to the reporting obligation; a summary of the content of the reportable cross-border arrangement; details of the national tax provisions creating a tax advantage; and identification of other member states likely to be affected by the arrangement.
Member states are required to automatically exchange information received with all other member states, via a centralized database, within one month from the end of the quarter in which the information was reported. Additionally, a catch-up provision is proposed for reportable cross-border arrangements implemented between formal adoption of the directive and December 31, 2018. Information on such cross-border arrangements must be filed by March 31, 2019.
In its proposal, the Commission acknowledges that domestic schemes for mandatory disclosure currently operate in some member states, and comments that the U.K.'s "DOTAS" rules have enabled the Government to introduce a range of anti-tax avoidance measures. While the requirement to report a scheme under the proposal does not necessarily mean that it is harmful, it will enable member states to assess the risk of an arrangement and where necessary, react to close down loopholes. According to the Commission, the ultimate objective is to design a mechanism that will dissuade intermediaries from designing and marketing such arrangements in the first place.
By Robert Walker, Senior Editor, Bloomberg Tax
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