On 25 June 2018, significant new EU cross border direct tax disclosure rules came into force, which will have an impact on businesses across the bloc.
These rules now fall to be implemented by all 28 EU Member States (including the UK under the terms of the expected Brexit transitional agreement). At first blush, the new requirements might resemble the existing rules under the UK’s Disclosure of Tax Avoidance Schemes (DOTAS) regime, but in reality they are much wider in scope and effect.
The changes take the form of a new EU Directive 2018/822 (the “Directive”), amending the existing Directive 2011/16/EU with respect to mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. As the Directive came into force on 25 June, it is important to begin to consider the implications of these developments at an early stage.
Cross-border reportable arrangements, where the first step of implementation is taken between 25 June 2018 and the date of application of the Directive on 1 July 2020, will have to be reported to HMRC by 31 August 2020, and are to be exchanged between the tax authorities in other EU Member States by 31 October 2020.
The deadline for Member States to adopt and publish new rules to comply with the Directive is 31 December 2019, and under the terms of the EU withdrawal agreement, the UK would be required to implement the rules before it leaves the EU (assuming a transition period ending in December 2020). HMRC is planning to make powers in the next Finance Bill to enable implementation by way of secondary legislation. A consultation on the details of the UK implementation is expected in 2019.
The obligation to report is imposed on natural or legal persons who are identified as intermediaries. Intermediaries are defined as 'any person that designs, markets, organizes or makes available for implementation or manages the implementation of the reportable cross-border arrangement.' The concept of intermediary also includes “any person that has undertaken to provide, directly or by means of other persons, aid, assistance or advice” with respect to the activities mentioned above. This definition could capture a group’s advisors depending on the precise facts and circumstances in any case.
In addition to the above conditions, in order to be considered an intermediary, a person has to have a connection with the EU established through at least one of the following: (a) being a tax resident in a Member State; (b) having a permanent establishment in a Member State through which the services related to the reportable arrangements are provided; (c) being incorporated in or governed by the laws of a Member State; (d) being registered with a professional association related to legal, taxation or consultancy services in a Member State
Moreover, if multiple intermediaries are involved in advising on the same arrangement, each of the intermediaries will be required to report the arrangement, unless it can prove that the arrangement has been reported already to the Member State, to which the reporting obligation exists by another intermediary. Where no intermediary is required to disclose, the obligation falls on the taxpayer instead.
Depending upon the precise interpretation of the broad definitions in the Directive, EU based businesses might well find themselves potentially constituting 'intermediaries' for the purposes of the Directive, with a requirement to appraise whether they are required to disclose any cross-border arrangement that meets one or more 'hallmarks'. The hallmarks target a relatively wide range of cross-border arrangements, including payments to entities not resident in any tax jurisdiction and reliant on unilateral transfer pricing safe harbours.
Whilst the overall objective of these new rules is to provide EU Member States with an additional tool with which to monitor the success of BEPS implementation and tackle perceived tax avoidance and aggressive tax planning, the manner in which they are crafted means they may impose an onerous burden on businesses. Businesses may need to have a process to identify and appraise potentially in-scope arrangements even where they are not necessarily tax motivated. It is an open question as to how many new disclosures will be generated by the new regime. These disclosures may be intended to inform changes in law across Member States or they might just be used as a way of monitoring the effectiveness of the BEPS regime.
There is a danger that, as these new rules are currently drafted and pending further guidance, they may not be consistent with the original Action 12 OECD design principles if they result in a very large number of transactions being caught. There is a question as to whether Member States are expecting a large volume of disclosures; it is not clear whether they will be equipped to process them (but this might not be enough to prevent them asking for the data).
We do not know at this stage whether there will be consistent interpretation of the rules across the 28 EU Member States. Therefore, reviewing arrangements in relation to the Directive and local rules, once available, will be critical.