The European has finally approved after a particularly quick procedure the Directive requiring so called tax intermediaries to supply specific information on transnational transactions with tax relevance. We are talking about Directive 2018/822 of 25 May 2018 (Official Journal June 5), amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.
1.- Background to the Directive
Some countries had tried out reporting mechanisms for transactions that could involve aggressive tax planning. Examples are the tax shelter disclosure system in the U.S. or the DOTAS (disclosure of tax avoidance schemes) regime in the UK. These experiences spread to other countries and were the inspiration for BEPS Action 12 on mandatory disclosure rules. In the final report on this action, the OECD called for the use of these disclosure regimes, in relation to the “promoters” of standard schemes identified through hallmarks. Disclosure would have the dual aim of providing immediate information to the authorities and as a deterrent from offering abusive planning schemes.
Taking up these ideas in the BEPS project, the European Commission submitted a Proposal for a Directive of 21 June 2017, and, following the political agreement by ECOFIN on March 13, 2018, the wording of Directive 2018/822 was reached containing notable differences with respect to the wording of the initial proposal, especially in relation to broadening the personal scope of the reporting obligation itself. The Directive amends Directive 2011/16, on automatic exchange of information between the member states in the field of taxation, which is why it is known as DAC6.
2.- Content of the Directive.
The contents of the Directive are easily summarized. The so called tax intermediaries must report to their tax authorities specific information on any cross-border arrangements in which they take part, where those arrangements have any of the hallmarks listed in the Directive itself. Then the member states will automatically exchange that information and therefore have prompt knowledge about abusive or potentially abusive planning arrangements.
The information must relate to a cross-border arrangement (“dispositifs” and “mecanismos” in the French and Spanish versions). There are no reporting obligations for purely domestic arrangements, not affecting any other state, although a member state may unilaterally include those transactions in the scope of the mandatory reporting regime.
No definition is given of “arrangement”. It must be interpreted as meaning any dealing or transaction or set of dealings. And these arrangements are mandatorily reportable where they have any of the characteristics or hallmarks set out in the New Annex IV to Directive 2011/16. These hallmarks appear to relate to different objectives. The first two of the five hallmark categories relate to the typical standard tax planning arrangements usually involving a tax purpose combined with a fee for the promoter and a confidentiality clause. The third category is targeted at arrangements leading to a no tax scenario by taking advantage of certain tax regimes including the absence of any corporate income tax or a zero or “almost zero” rate. The fourth category is designed to deter arrangements that may have an impact on the automatic exchange of information between countries and the identification of beneficial ownership. And the last category is perhaps the most controversial due to relating to transfer pricing matters. It includes arrangements linked to the transfer of hard-to-value intangibles and certain reorganizations between companies in the same group with transfers of functions, risks or assets, if the projected annual earnings before interest and taxes (EBIT) of the transferor over the three-year period after the transfer, are less than 50% of the projected annual EBIT if the transfer had not been made.
It is the intermediaries of a member state, not the taxpayers, in principle, that have the obligation to report these arrangements. And the Directive deals with a very broad definition of intermediary. It encompasses anyone who designs, markets, organizes, or makes available for implementation or manages the implementation of a reportable cross-border arrangement. But it also means anyone that knows or could be reasonably expected to know that they have undertaken to provide, directly or through others, marketing, organizing, making available for implementation or managing the implementation of a reportable cross-border arrangement. Where more than one intermediary is involved, the reporting obligation falls on all of them, unless the same information has already been filed by another of those intermediaries. The relevant taxpayer has the reporting obligation only if there is no intermediary because the arrangement was devised and implemented in house or where the national rules on legal professional privilege relieves all the intermediaries from this obligation.
The reportable information appears to relate only to identifying the transactions, their characteristics and values.
This Directive plays a crucial part in the move to review tax planning practices, but has a defect by starting out from a lack of definition because it mixes up the information, and the combatting and the prevention of tax fraud, without clarifying the limits separating them, and shies away from any attempt to make the system it sets out serve to give greater legal certainty. To the contrary, it advises that the reporting of this information does not serve to obtain any degree of certainty in advance over the validity that the tax authorities will give to these arrangements. So its implementation in the various states may be confused and could ironically aid tax competition between them in addition to placing obstacles to the functioning of the internal market by leaving out purely domestic arrangements.
In Spain’s case, the transposition of the Directive will without a doubt rekindle old problems that have never been resolved: how to define tax advisors and the meaning and scope of their legal professional privilege. Elsewhere, by somehow singling out so called tax planning it will affect the internal organization of the profession.
This post is also available in: Español (Spanish)