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 the adoption of the EU Directive on Administrative Cooperation (DAC6), these proposals came into force on 25 June 2018.
The usual process of adoption by member states means that the rules must now 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 June 2018 must still be reported, with the first reports under this new regime to be made in July 2020. After that date, disclosures will be required within 30 days of commencing any reportable arrangement.
HMRC has published draft regulations and are undertaking a consultation on their implementation which is due to close in October 2019. BDO is participating in that process, and it is clear that there are many practical challenges still to be resolved.
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. In particular, they include transfers that are ‘base erosive’ simply in virtue of transferring certain assets or businesses from one jurisdiction to another. They also cover arrangements that may be designed to circumvent EU or OECD rules on transparency (eg circumventing the Common Reporting Standard or obscuring beneficial ownership of certain assets). While the OECD’s 2018 model disclosure rules on tax transparency 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), DAC 6 sets out a number of ‘hallmarks’ for identifying the types of arrangement that must be reported. 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 assets (including intangibles such as IP) 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 advisers (so-called ‘intermediaries’). There are two types of intermediaries, which include those ‘promoting’ arrangements (typically tax advisers and lawyers) and a wider class of ‘service providers’. This latter group could include banks, financial advisers, trustees, administrators, accountants 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 jurisdictions within the EU on a quarterly basis from 31 October 2020 via a new EU central directory on administrative co-operation. The taxpayer’s will have an ongoing obligation to disclose the arrangements on their tax returns.
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 regulations and formal guidance are provided, it will be difficult to know exactly what will need to be reported. There is also a significant risk that the requirements of DAC 6 will result in disclosures of common or garden commercial transactions that are of no interest to taxing authorities, or, worse, multiple disclosures of an arrangement by different intermediaries. Neither of these are desirable for taxpayers, intermediaries or HMRC, but there does not yet appear to be a clear solution to the problem.
Many organisations are also struggling with embedding these uncertain requirements into their internal processes and tracking arrangements that they may need to report in July 2020. A penalty regime that can result in penalties up to £1m has exacerbated these concerns.
Does a disclosure 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.
Over time, we would hope that a system may eventually evolve through feedback from member states to the EU central directory on administrative cooperation whereby greater clarity emerges on the sorts of arrangements that are properly reportable. Clearly, the possibility that different jurisdictions may interpret the rules differently (most obviously under common law and civil law) means that this evolution may take some time.
In the meantime, a DAC 6 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. The reputational issues associated with a DAC 6 report will need to be considered carefully by both taxpayers and intermediaries.
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 the DAC 6 rules. If you would like to discuss the status of DAC 6 implementation please get in touch with you usual BDO adviser or contact Chris Chapple.
Read more on the new DAC6 rules.
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