As part of its ongoing work on international tax avoidance, in 2017 the European Commission launched proposals for mandatory automatic exchange of information between member states about cross-border tax avoidance arrangements. With adoption of EU Directive on Administrative Cooperation (DAC6), the amending directive came into force on 25 June 2018.
While the usual process of adoption by member states means that the rules must then be incorporated into the law of each Member State by the end of 2019 (the UK is expected to adopt them despite Brexit). However, relevant arrangements entered into from 25 Jun 2018 must still be reported with the first reports under this new Mandatory Disclosure Requirement (MDR) to be made in July 2020. After that date, disclosures will be required within 30 days of commencing any reportable arrangement.
We are expecting HMRC to begin a consultation on draft legislation later in 2018, and BDO will be participating in that process.
What is disclosable?
In many cases, arrangements that are reportable will have a ‘tax advantage’ attached to them. However, the EU rules go further and cover arrangements with no obvious tax motive. They also cover arrangements that may be designed to circumvent EU or OECD rules on transparency. While the OECD’s recently published disclosure rules on tax transparency (ie steps taken to circumvent CRS or obscure beneficial ownership of certain assets – so-called ‘Opaque Offshore Structures’), do not have the force of law, they will be used as a source of interpretation of the EU rules.
In a similar way to the UK’s existing rules for disclosure of tax avoidance schemes (DOTAS), the Directive sets out a number of ‘hallmarks’ for identifying the types of arrangement that must be disclosed. These are defined very widely, but some examples of arrangements potentially considered reportable include:
- Certain intra-group payments or transfers of assets where tax is not charged in full on the receipt
- Transactions or structures where the effect (not necessarily the motive) is to undermine the automatic exchange of information or where it is not possible to identify beneficial owners
- Certain transfer pricing arrangements utilising ‘safe harbours’
- Certain transfers of intangible assets or business functions between jurisdictions
- Arrangements characteristic of tax avoidance schemes such as converting income into capital
- Standardised tax products (eg those involving confidentiality clauses, contingent fees and so forth).
Who is obliged to disclose what?
The primary obligation to disclose will be with the taxpayer’s adviser (the intermediary – eg a bank, financial adviser, lawyer, tax adviser or accountant etc). However, the information that must be disclosed will include providing HMRC with details of the taxpayer: HMRC will then pass this information on to the relevant tax jurisdiction/s within the EU on a quarterly basis from 31 October 2020 via a new EU central directory on administrative cooperation.
A majority of the hallmarks are clearly aimed at companies, but the rules on tax transparency are likely to also apply to individuals. Therefore, all taxpayers need to be aware of the potential reporting issues when they are undertaking arrangements that might trigger a disclosure.
As usual, the EU Directive sets a statutory minimum for the local disclosure legislation. Therefore, until the rules are transposed into UK law and some formal guidance is provided, it will be difficult to know exactly what will need to be reported. HMRC is was an early adopter in terms of implementing DOTAS and, while it will consult on how the new MDR will be implemented, it would not be surprising if it turns out to have similar elements to the current DOTAS rules. However, there still many unknowns. For example, we know that a penalty regime will apply in cases of non-compliance, but it is not yet known what the penalties or other associated consequences (eg publicity or reputational implications) would be.
Does a disclosure under MDR imply violation of tax rules?
No. As with UK DOTAS, disclosure in itself does not imply the violation of any tax rule. The OECD expressly states this in the introduction to its disclosure rules on tax transparency.
When the UK DOTAS regime was implemented, it quickly became clear that although many taxpayer arrangements were disclosed, this did not always spell difficulties for the taxpayer concerned. Over time, HMRC improved its guidance to make clear where an arrangement, although disclosable, was not contentious or likely to be challenged. A similar system may eventually evolve through feedback from member states to the EU central directory on administrative cooperation.
However, an EU MDR disclosure may lead to increased risk of tax enquiries and possible challenge and even to the relevant tax authority reviewing and altering its tax legislation. It is also possible that a series of disclosures could affect the taxpayer’s ‘risk’ profile as far as HMRC is concerned, leading to enhanced scrutiny in other areas.
With Brexit and US tax reform driving the need to review and adjust cross-border structures, businesses should consider carefully the potential implications of disclosure when undertaking any transactions that might fall within these new EU MDR rules. If you would like help or advice on any disclosure issue please get in touch with you usual BDO adviser or contact Chris Chapple.
Read more on the new EU MDR rules.
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