The new reporting obligation on intermediaries and relevant taxpayers for international transactions with potentially aggressive tax planning arrangements
Tax Commentary 5-2018
Council Directive (EU) 2018/822 (the Directive) of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements was published in the Official Journal on June 5.
In accordance with action 12 of the BEPS Action Plan, this is the latest initiative on tax transparency across the EU and its direct aim is (i) for the tax authorities of the Member States to obtain complete information on so called “potentially aggressive tax arrangements” and (ii) for this information to be exchanged among those states.
The Council takes the view that by having that information, national tax authorities will be able to react promptly against harmful tax practices and clamp down on tax avoidance and evasion in the internal market. Moreover, placing the obligation on “intermediaries” (advisors, marketers, etc.) or, if there is a legal professional privilege, on the beneficiary taxpayers themselves (who must be identified), is expected to achieve a dissuasive effect in its implementation.
After defining as “hallmarks” the characteristics or features of a cross-border arrangement that presents an indication of a potential risk of tax avoidance, the Directive categorizes and lists the reportable transactions in the Annex, stating that in all cases they should have a cross-border dimension, in other words, affect more than one Member State or one Member State and a third country.
The Directive comes into force on June 25, 2018, although its provisions start to apply on July 1, 2020. This means that on June 25, 2018, parties with reporting obligations must collect and store the information in question to be able to comply with their obligations when the date of application arrives.
To enable compliance, the Member States should –by December 31, 2019– adopt and publish the necessary provisions, among which the Directive expressly requires the Member States to lay down penalties that are “effective, proportionate and dissuasive”.
- PARTIES WITH REPORTING OBLIGATIONS
The Directive makes the reporting obligation lie firstly with the “intermediary” and, secondarily, with the “relevant taxpayer”, and these categories are defined as follows:
- Any person that designs, markets, organizes, or makes available for implementation, or manages the implementation of, a reportable cross-border arrangement; or
- Any person that, having regard to the relevant facts and circumstances and based on available information and the relevant expertise and understanding required to implement such services, knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organizing, making available for implementation, or managing the implementation of a reportable cross-border arrangement.
In both cases, for an intermediary to have a reporting obligation, they must satisfy at least one of the following additional conditions:
- be resident for tax purposes in a Member State;
- have a permanent establishment (PE) in a Member State through which the services with respect to the arrangement are provided;
- be incorporated in, or governed by, the laws of, a Member State;
- be registered with a professional association related to legal, taxation or consultancy services in a Member State.
- “Relevant taxpayer”: any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement.
As a general rule, the reporting obligation should only lie with the relevant taxpayer in the following cases:
- Absence of an intermediary, because the intermediary is outside the EU or because there is no intermediary as such because the reportable cross-border arrangement has been designed and implemented internally by the relevant taxpayer.
- Existence of a national provision relieving the intermediary from the reporting obligation, on the basis of a legal professional privilege. In this case, the intermediary must notify its obligations to the other intermediaries with reporting obligations and, if there are no such intermediaries, to the relevant taxpayer. The scope of the professional privilege should be defined under the legislation of every Member State.
In those cases where more than one party has a reporting obligation the following tests should apply:
- More than one intermediary: the reporting obligation lies with all of them individually.
- More than one relevant taxpayer: the reporting obligation lies with the relevant taxpayer that agreed the reportable cross-border arrangement with the intermediary or, in the absence of that taxpayer, with the relevant taxpayer that manages the implementation of the arrangement.
In both cases the intermediary or taxpayer may be exempt from filing the information if it has proof, in accordance with national law, that the required information has been filed by another intermediary or by the relevant taxpayer.
- REPORTABLE ARRANGEMENTS
In all cases the reportable arrangements must have a cross-border dimension. For these purposes, the Directive defines “cross-border arrangements” as those involving more than one Member State or a Member State and a third country where at least one of the following conditions is met:
- not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
- one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
- one or more of the participants in the arrangement carries on business in another jurisdiction through a PE situated in that jurisdiction and the arrangement forms part or the whole of the business of that PE;
- one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a PE situated in that jurisdiction;
- such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
Not all “cross-border arrangements” have to be reported, however. For there to be an obligation to report them, they must fall within what the Directive calls “reportable cross-border arrangements”, defined as any cross-border arrangement that contains at least one of the “hallmarks” set out in the Annex to the Directive.
These hallmarks are defined as characteristics or features of a cross-border arrangement that presents an indication of a potential risk of tax avoidance, and fall into two categories: (i) generic; and (ii) specific.
Moreover, some of the hallmarks additionally require the main benefit test to be satisfied. According to the Directive, the “main benefit” test is satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
I. HALLMARKS REQUIRING SATISFACTION OF THE MAIN BENEFIT TEST
- Generic hallmarks (listed under category A in the Annex)
- The existence of a condition of confidentiality between the intermediary and the relevant taxpayers, which may require them not to disclose how the arrangement could secure a tax advantage;
- An arrangement where the intermediary is entitled to receive a fee determined by reference to the amount of the tax advantage derived from the arrangement or whether or not a tax advantage is actually derived from the arrangement;
- An arrangement that has substantially standardized documentation and/or structure and is available to more than one relevant taxpayer without a need to be substantially customized for implementation.
- Specific hallmarks (listed under categories B, C.1.b).i), C.1.c) and C.1.d) in the Annex)
- Contrived acquisition of a loss-making company, discontinuing the main activity of such company and using its losses in order to reduce its tax liability, including through a transfer of those losses to another jurisdiction or by the acceleration of the use of those losses;
- Conversion of income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax;
- Circular transactions resulting in the “round-tripping” of funds, namely through involving interposed entities without any other primary commercial function;
- An arrangement that involves deductible cross-border payments made between associated companies where the recipient does not apply any corporate income tax, or applies the tax at a rate of zero or almost zero, or the payment benefits from a full exemption from tax in the jurisdiction, or the payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes.
II. HALLMARKS NOT REQUIRING SATISFACTION OF THE MAIN BENEFIT TEST (specific hallmarks listed under categories C.1.a), C.1.b).ii), C.2, C.3, C.4, D and E in the Annex)
- An arrangement that involves deductible cross-border payments made between associated companies where the recipient is not resident for tax purposes in any jurisdiction, or is resident for tax purposes in a third country assessed by Member States collectively or within the framework of the OECD as being non-cooperative;
- Claiming deductions for the same depreciation on the asset in more than one jurisdiction;
- Claiming relief from double taxation in respect of the same item of income or capital in more than one jurisdiction;
- There are transfers of assets and there is a material difference in the amount being treated as payable for those assets in those jurisdictions involved;
- The hallmarks concerning transfer pricing contain: (i) the use of unilateral safe harbor rules; or (ii) the transfer between associated companies of hard-to-value intangibles or rights in intangibles; or (iii) an intragroup cross-border transfer of functions, risks or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer are less than 50% of the projected annual EBIT if the transfer had not been made;
- Lastly, there is a category of specific hallmarks relating to arrangements or structures that hinder or impede compliance with reporting obligations on the financial accounts or investments held by private parties:
- Arrangements that have the effect of undermining the obligation concerning the automatic exchange of financial account information;
- The existence of a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures.
- REPORTABLE INFORMATION
After reportable cross-border arrangements have been identified, the information that must be sent to the tax authority concerned is as follows, as applicable:
- Identification and full particulars of the intermediaries and of the relevant taxpayers;
- Details of the hallmarks set out in the Annex that make the cross-border arrangement reportable;
- Summary of the content of the reportable arrangement;
- Date on which the first step in implementing the reportable cross-border arrangement was, or will be, made;
- Details of the national provisions that form the basis of the reportable cross-border arrangement;
- Value of the reportable cross-border arrangement;
- Identification of the Member State of the relevant taxpayer;
- Identification of any other person or Member State likely to be affected by the reportable arrangement.
This information must be reported on a standard form that should be approved for these purposes by the competent authority in each Member State.
The Directive authorizes the Member States to adopt the necessary measures to require that each relevant taxpayer file information about their use of the arrangement in each of the years for which they use it.
The Member States are required to share the information they receive with the tax authorities in other Member States, by means of an automatic exchange, in relation to which the Commission should only be granted access to a sufficient amount of that information to enable it to monitor the proper functioning of the Directive.
Lastly, in an important clarification, the Directive expressly specifies that if a tax authority in a Member State fails to react to a reported arrangement, this cannot ever imply that the State concerned accepts the validity or tax treatment of that arrangement.
- MULTIPLE REPORTING OBLIGATION
Where the intermediary has an obligation to file information in more than one Member State, that information only has to be filed in the State that features first in the following list:
- the Member State where the intermediary is resident for tax purposes;
- the Member State where the intermediary has a PE through which the services with respect to the arrangement are provided;
- the Member State where the intermediary is incorporated or governed by its laws;
- the Member State where the intermediary is registered with a professional association related to legal, taxation or consultancy services.
Whereas if a relevant taxpayer has an obligation to file information with more than one Member State, that information only has to be filed in the Member State that features first in the list below:
- the Member State where the relevant taxpayer is resident for tax purposes;
- the Member State where the relevant taxpayer has a PE benefiting from the arrangement;
- the Member State where the relevant taxpayer receives income or generates profits, although the relevant taxpayer is not resident for tax purposes and has no PE in any Member State;
- the Member State where the relevant taxpayer carries on an activity, although the relevant taxpayer is not resident for tax purposes and has no PE in any Member State.
In all cases involving a multiple reporting obligation in more than one jurisdiction, the intermediary or the relevant taxpayer are exempt from filing the information if they have proof that the same information was filed in another Member State.
- REPORTING TIMEFRAMES
The intermediaries and relevant taxpayers with a reporting obligation must file the information with the competent authorities within 30 days, beginning on whichever of the following dates occurs first:
- the day after the arrangement is made available for implementation; or
- the day after the arrangement is ready for implementation; or
- when the first step in the implementation of the arrangement has been made.
For their part, the intermediaries that provide aid, assistance or advice with respect to designing, marketing, organizing, making available for implementation, or managing the implementation of, a reportable cross-border arrangement, must notify it within 30 days beginning on the day after they provided aid, assistance or advice, directly or by means of other persons.
In the case of “marketable arrangements”, intermediaries should be required to make a periodic report every three months, providing an update of previously reported information.
The Directive does not specify the penalty terms to be laid down in the event of failure to comply with its provisions, instead it allows the Member States to determine the specific contours, by requiring them to take the necessary measures to ensure that its provisions are enforced.
The Directive’s guidance in this respect is that the penalties laid down by the Member States should be “effective, proportionate and dissuasive”.
- ENTRY INTO FORCE
LThe date of entry into force of the Directive is June 25, 2018 and the Member States must transpose it by December 31, 2019.
The provisions in the Directive must be applied from July 1, 2020, when the Member States are to exchange information every quarter through a secure central directory. So the first exchange of information will take place on October 31, 2020.
A kind of retroactive effect has also been provided in relation to reportable cross-border arrangements where the first step of the arrangement was implemented between June 25, 2018 and July 1, 2020, which the intermediaries or relevant taxpayers must report by August 31, 2020.
 The Annex specifies that satisfying only one of these conditions is not a sufficient ground in itself to conclude that a given arrangement satisfies the main benefit test.