On June 21, 2017 the European Commission (EC) published a proposal for amending the Directive on administrative cooperation in the field of taxation (Directive 2011/16/EU). The proposal introduces an obligation on intermediaries to disclose potentially aggressive cross-border tax planning arrangements and also the means for tax administrations to exchange information on these structures. The enhanced transparency requirement is a consequence of recent revelations on harmful tax practices and the use of offshore companies (the ‘LuxLeaks’ and ‘Panama Papers’) and the disclosure rules proposed by the OECD in BEPS Action 12.
1. Proposal in short
The proposal introduces an obligation for intermediaries to disclose potentially aggressive tax planning arrangements to their tax authorities. The tax authorities subsequently have to exchange this information automatically with other tax authorities. The proposal does not dictate penalties but leaves it to the Member States to implement effective, proportionate and dissuasive penalties.
2. What is a reportable cross-border arrangement
The proposal targets aggressive tax planning arrangements. The proposal does not contain a definition of the term ‘arrangement’. As a consequence, it is not clear whether the proposal only targets general, marketable ‘product-type’ structures, or whether regular tax advice is targeted by the proposal too. The concept of ‘aggressive tax planning’ is also not defined. However, an annex to the proposal lists a number of ‘hallmarks’ that present a strong indication of tax avoidance or abuse. A cross-border arrangement becomes reportable if it meets one or more of the hallmarks.
The hallmarks are divided between generic and specific hallmarks. Generic hallmarks relate to the engagement between the intermediary and the taxpayer. Examples are confidentiality conditions in relation to other intermediaries or the tax authorities and/or fees that are contingent upon the amount of tax advantage derived from the arrangement. Specific hallmarks refer, for example, to the use of losses; the conversion of income into another category of revenue taxed at a lower level; deductible cross-border payments that benefit from a preferential tax regime at the level of the recipient; where the recipient of the deductible payment is resident in a jurisdiction that imposes corporation tax at less than half the average rate in the EU or in a jurisdiction included on the EU blacklist. Mismatches within the scope of ATAD 2 as regards hybrid mismatches with third countries are also listed as a hallmark, among other things.
4. Who has to report
The burden of reporting cross-border arrangements falls to the intermediary. An intermediary is the person or entity that carries the responsibility vis-à-vis the taxpayer for designing, marketing, organizing or managing the implementation of a reportable cross-border arrangement in the course of providing services relating to taxation. If there is no intermediary the obligation to disclose shifts to the taxpayer that uses the arrangement. This can be the case, for example, because the taxpayer designs and implements an arrangement in-house, when the intermediary does not have a presence within the EU or where the intermediary cannot disclose the information because of a legal professional privilege.
Intermediaries need to disclose the reportable cross-border arrangements within five working days after they become available for implementation. The subsequent automatic exchange of information must take place every quarter of a year. The information must be communicated for the first time by the end of the first quarter of 2019.
6. The information to be exchanged
The information that has to be exchanged includes: identification of taxpayer and intermediary; details of the hallmark(s); the date of implementation; the value of the transactions or series of transactions included in the reportable cross-border arrangement; identification of involved Member States and identification of any person in the other Member States likely to be affected.
7. Entry into force
Upon approval by European Parliament and ECOFIN Member States should implement the proposal by December 31, 2018 at the latest and apply the new legislation as from January 1, 2019.
8. Comments by Meijburg & Co
The proposal goes beyond the recommendations of BEPS Action 12 and proposes a wide ranging exchange of information. Our main concern, apart from confidentiality and privacy issues, is the fact that a crucial term in the draft proposal, the term ‘arrangement’, is not defined at all. As a result, it is not clear whether regular tax advice, for example regarding the conversion of a loan into equity or vice versa, regarding the prevention of tax loss evaporation or regarding changes in a value chain, is within the scope of the proposal. A wide range of transactions may potentially fall within the scope of the Directive.