Is it time to disclose your tax structure?
The new EU Mandatory Disclosure Regime for certain tax planning arrangements
Young PE Leaders – Tax Working Group
Lead Pen for this publication: Per Ohlin, EY
On 13 March 2018 the Economic and Financial Affairs Council (‘ECOFIN’) reached a political agreement on the text of a new Directive (Council Directive amending Directive 2011/16/EU with respect to the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements, the ‘MDR Directive’) requiring intermediaries (defined below) and taxpayers to disclose information on potentially aggressive tax planning arrangements.
Such disclosures are intended to provide the Tax Authorities of the Member States of the European Union (‘EU’) with information to enable them to take early actions when potentially aggressive tax arrangements are designed and implemented. Reporting requirements are intended to act as a deterrent to those who promote aggressive tax planning schemes, as well as users of such schemes and aim at driving a behavioral change in the tax planning environment.
According to the text of the MDR Directive, intermediaries and relevant taxpayers shall file information on ‘reportable cross-border arrangements’, defined as any cross-border arrangement or series of arrangements that fulfils at least one of the ‘hallmarks’ included in Annex IV of the amended Directive 2011/16/EU.
Cross-border arrangements are those which concern either more than one Member State or a Member State and a third country where at least one of the following conditions is fulfilled: (i) participants are tax resident in two or more jurisdictions; (ii) one or more participants are dual residents; (iii) the arrangement is part of the business of a permanent establishment; (iv) a participant carries on an activity in another jurisdiction without having a tax presence in that jurisdiction; (v) the arrangement affects the automatic exchange of information or the identification of beneficial ownership.
A hallmark is a characteristic or feature of a cross-border arrangement or series of arrangements, which – according to the EU – presents an indication of a potential risk of tax avoidance. The scope of the hallmarks is very broad and every two years (after 1 July 2020) the Member States and the Commission shall evaluate the relevance of the hallmarks included in Annex IV of the amended Directive 2011/16/EU. Hallmarks can be distinguished between (i) those for which the ‘main benefit test’ (‘MBT’) needs to be passed as a gateway criterion before triggering a reporting obligation and (ii) those which by themselves trigger a reporting obligation. When applicable, the MBT will be satisfied if it can be established that the main benefit or one of the main benefits which – considering all relevant facts and circumstances – a person may reasonably expect to derive from an arrangement, is the obtaining of a tax advantage.
The MDR Directive will enter into force on 25 June 2018. EU Member States will have time until 31 December 2019 to transpose the MDR Directive into national law, which shall be applicable as of 1 July 2020. Intermediaries and relevant taxpayers shall file information on the reportable cross-border arrangements by 31 August 2020 and the first exchange of information shall take place by 31 October 2020. Each Member State shall take the necessary measures to require intermediaries and relevant taxpayers to file information on reportable cross-border arrangements the first step of which was implemented between the date of entry into force and the date of application of the MDR Directive.
The obligation to file information on a reportable cross-border arrangement shall lie with the intermediary or, if there is no such intermediary, with the relevant taxpayer.
An intermediary is:
- any person that designs, markets, organizes or makes available for implementation or manages the implementation of the reportable cross-border arrangement; or
- any person that knows or could be reasonably expected to know that he/she/it has undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to the activities mentioned above;
but only if at least one of the following conditions is fulfilled:
- the person is tax resident in a Member State;
- the person has a permanent establishment in a Member State through which the services related to the arrangements are provided;
- the person has been incorporated in or is governed by the laws of a Member State;
- the person is registered with a professional association related to legal, taxation or consultancy services in a Member State.
Taxpayers must report themselves if:
- no person qualifying as an intermediary is involved in a reportable cross-border arrangement (e.g., if an adviser is not EU-based or planning is developed ‘in-house’); or
- an EU-based intermediary is prevented by the legal professional privilege from disclosing information.
The disclosure obligation exists even if the taxpayer does not have any taxable presence for corporate income tax purposes in one of the EU Member States. All information on reportable cross-border arrangements that is within the intermediaries’ knowledge, possession or control will be subject to reporting. The amended Directive 2011/16/EU relates to direct taxes and specifically carves out VAT, Customs and Excise Duties. Therefore the new rules apply to all types of direct taxes (income, corporate, capital gains, inheritance etc.).
Penalties for non-compliance will be determined by national laws. In its agreed text, the Directive requires the penalties for non-compliance to be “[…] effective, proportionate and dissuasive”. The reported information will be exchanged to other Member States by means of the automatic information exchange protocols on a regular basis, within one month from the end of the quarter in which the information was reported. The absence of a reaction by the Tax Authorities to a reported arrangement does not imply that they accept its effectiveness.
A Directive is binding as to the result to be achieved, but leaves the choice on methods and forms to the national authorities of the Member States to which it is addressed. Indeed – in principle – Directives are not directly applicable and the legislator of each Member State shall implement national measures to transpose Directives and bring national law in line with the Directives’ objectives. Member States are thus granted a certain level of discretion in implementing Directives.
At this stage, it is still unclear how Luxembourg will implement the new EU mandatory disclosure regime and more clarity will be provided only when the implementation of the MDR Directive into national law becomes effective. However, this would not preclude the possibility of conflicting interpretations and will leave room for uncertainties.
What is indisputable already today is the fact that the new EU mandatory disclosure regime is far-reaching and will not leave many taxpayers unaffected.