On June 21, 2017 the European Commission came with a proposal introducing new transparency rules for intermediaries - such as tax advisors, accountants, banks and lawyers - who design and promote tax planning schemes for their clients. The new transparency rules are laid down in a proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. The European Commission intends the new reporting requirements to apply from January 1, 2019.
When to report?
The arrangement has to be reported if it bears at least one of the indicators - "hallmarks" - outlined in the proposal. The hallmarks the European Commission has identified are divided in 5 categories:
· Generic hallmarks
· Specific hallmarks which may be linked to the main benefit test
· Specific hallmarks related to cross-border transactions
· Specific hallmarks concerning automatic exchange of information agreements in the Union
· Specific hallmarks concerning transfer pricing
The hallmarks are laid down in an Annex. With respect to the generic hallmarks and specific hallmarks which may be linked to the main benefit test the Annex arranges that these may only be taken into account where they fulfil the "main benefit test".
Main benefit test
According to the proposal the main benefit test will be satisfied where the main benefit of an arrangement or of a series of arrangements is to obtain a tax advantage if it can be established that the advantage is the outcome which one may expect to derive from such an arrangement, or series of arrangements, including through taking advantage of the specific way that the arrangement or series of arrangements are structured.
Generic hallmarks
The European Commission has identified the following generic hallmarks:
1. An arrangement or series of arrangements where the taxpayer undertakes to comply with a condition of confidentiality which may require them not to disclose how the arrangement could secure a tax advantage vis-à-vis other intermediaries or the tax authorities.
2. An arrangement or series of arrangements where the intermediary is entitled to receive a fee (or interest, remuneration for finance costs and other charges) for the arrangement or series of arrangements and this fee is fixed by reference to:
(a) the amount of the tax advantage derived from the arrangement or series of arrangements; or
(b) whether or not a tax advantage is actually derived from the arrangement or series of arrangements. This would include an obligation on the intermediary to partially or fully refund the fees where the intended tax advantage derived from the arrangement or series of arrangements was not partially or fully achieved.
3. An arrangement or series of arrangements that involves the use of standardised documentation including standard forms. The documentation is commonly available to more than one taxpayer and does not need to be tailor-made to enable a taxpayer to implement the arrangement or series of arrangements.
Specific hallmarks which may be linked to the main benefit test
The European Commission has identified the following specific hallmarks which may be linked to the main benefit test:
1. An arrangement or series of arrangements whereby the taxpayer uses losses to reduce their tax liability, including through the transfers of those losses to another jurisdiction or by the acceleration of the use of those losses.
2. An arrangement or series of arrangements that has the effect of converting income into capital, gifts or other categories of revenue which are taxed at a lower level.
3. An arrangement or series of arrangements which includes circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features.
Specific hallmarks related to cross-border transactions
The European Commission has identified the following specific hallmarks related to cross-border transactions:
1. An arrangement or series of arrangements that involves deductible cross-border payments made between two or more related parties where at least one of the following conditions occurs:
(a) the recipient is not resident for tax purposes in any tax jurisdiction;
(b) although the recipient is resident for tax purposes in a jurisdiction, that jurisdiction either: i. does not impose any corporate tax; or ii. imposes corporate tax at zero rate or at a statutory corporate tax rate lower than half of the average statutory corporate tax rate in the Union, as it stands at the end of the previous calendar year; or iii. is included in a list of certain third-country jurisdictions which have been assessed by Member States collectively or within the framework of an international organisation as having harmful tax regimes.
(c) the payment benefits from a partial or full exemption from tax in the jurisdiction where the recipient is resident for tax purposes;
(d) the payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes;
(e) there is a mismatch within the scope of Council Directive amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries, which was adopted by the Council of Ministers on 23 May 2017. 2. The same asset is subject to depreciation in more than one jurisdiction.
3. More than one taxpayer can claim relief from double taxation in respect of the same item of income in different jurisdictions.
4. There is an arrangement or series of arrangements that includes transfers of assets and where there is a material difference in the amount being treated as payable in consideration for the assets in those jurisdictions involved.
Specific hallmarks concerning automatic exchange of information agreements in the Union
With respect to specific hallmarks concerning automatic exchange of information agreements in the Union, the proposal arranges that an arrangement or series of arrangements which circumvent Union legislation or agreements on the automatic exchange of information, including agreements with third countries, and that have the effect of avoiding the reporting of income to the State of tax residence of the taxpayer. These arrangements may include:
(a) the use of jurisdictions that are not bound by the Union legislation or agreements on the automatic exchange of information;
(b) the re-classification of the types of income into categories that are not subject to the automatic exchange of information;
(c) the use of legal entities and structures that are not captured by either the Union legislation or agreements on the automatic exchange of information;
(d) the use of jurisdictions with inadequate or weak regimes of enforcement of anti-money laundering legislation. This includes where there are a lack of rules for identifying the beneficial ownership of legal entities, including trusts, foundations and special purpose vehicles or where there is a use of nominees or powers of attorney to conceal the identity of the beneficial owner.
Specific hallmarks concerning transfer pricing
The European Commission has identified the following specific hallmarks concerning transfer pricing:
1. An arrangement or series of arrangements which does not conform with the arm's length principle or with the OECD transfer pricing guidelines, including the allocation of profit between different members of the same corporate group.
2. An arrangement or series of arrangements which falls within the scope of the automatic exchange of information on advance cross-border rulings but which is not reported or exchanged
Intermediaries shall disclose the reportable arrangements within 5 days beginning on the day after such arrangements become available to a taxpayer for implementation.
Where the disclosure is shifted to taxpayers in the absence of a liable intermediary, the timing for disclosure is placed slightly later; that is, within 5 days beginning on the day after the reportable cross-border arrangement or the first step in a series of such arrangements has been implemented.
The Member State in which the arrangements are reported must automatically share this information with all other Member States, in a standard format, through a centralised database and on a quarterly basis.
Penalties
Member States must ensure effective, proportionate and dissuasive penalties for intermediaries that do not respect the reporting requirements. The decision on the exact nature of these penalties is being left as a national competence and each Member State must decide its own national sanctions to apply. These could include, for example, fines or administrative sanctions.
It is foreseen that the new reporting requirements would enter into force on January 1, 2019, with EU Member States obliged to exchange information every 3 months after that.
Click here to be forwarded to the Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements as released by the European Commission on June 21, 2017.
Click here to be forwarded to the Annex to the Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements as released by the European Commission on June 21, 2017.
Click here to be forwarded to a Q&A that the European Commission published with respect to its proposal from June 21, 2017.
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