This close to disclose?
New mandatory disclosure requirements for intermediaries and relevant taxpayers, aimed at boosting transparency to tackle aggressive cross-border tax planning, will enter into force on 25 June 2018. The arrangements described as “reportable” are very wide-ranging and therefore it cannot be assumed that taxpayers which do not want to be associated with “aggressive tax avoidance” do not have arrangements in place that are disclosable.
07 Jun. '18
Patrick T.F. Schrievers
New mandatory disclosure requirements for intermediaries and relevant taxpayers, aimed at boosting transparency to tackle aggressive cross-border tax planning, will enter into force on 25 June 2018. EU Member States have until 31 December 2019 to implement the amendments to have it formally in place on 1 July 2020 at the latest. Even though the disclosure requirements may not be applicable before 2020, it could already impact reportable cross-border arrangements taking place later this year. The arrangements described as “reportable” are very wide-ranging and therefore it cannot be assumed that taxpayers which do not want to be associated with “aggressive tax avoidance” do not have arrangements in place that are disclosable.
The new requirements are the most recent amendments to the Directive on administrative cooperation in the field of taxation (“DAC6”). The Directive will require intermediaries such as tax advisors, accountants and lawyers that design and/or promote tax planning schemes to report schemes that are considered potentially aggressive. There will be penalties for intermediaries that do not comply. Member States will be required to automatically exchange the information they receive through a centralized database.
The Directive establishes 'hallmarks' to identify the types of schemes to be reported to the tax authorities. Certain hallmarks will only apply if also a broader “main benefit test” has been satisfied. This main benefit test is comparable to the Principle Purpose Test as outlined in BEPS Action 6, and is generally met if it can be established that the main benefit (or one of the main benefits) that a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
The ‘hallmarks’ consist of generic and specific hallmarks. The generic hallmarks relate specifically to the engagement between the intermediary and the taxpayer. An example of this would be fees that are contingent upon the amount of a tax advantage derived from an arrangement. For a generic hallmark to apply, the main benefit test has to be met as well. It depends on the type of specific hallmark test whether or not it is covered by the main benefit test as well.
Below is a list of the types of the reportable “hallmarks”. The list illustrates that the hallmarks capture a wide range of arrangements, including ones that are not typically perceived as being potentially “aggressive”, such as “unilateral transfer pricing safe harbour rules” and “transfers of hard-to-value intangibles”.
HALLMARKS SUBJECT TO THE MPT
- A confidentiality clause on how the arrangement produces a tax advantage
- A contingent fee
- Standardised documentation or structure
- A Loss-making company is acquired and its losses are used outside the business of the acquired company
- Income is converted into capital or income with a more beneficial tax treatment
- Round tripping of funds occurs using conduits or entities without substance
- Deductible cross-border payments to associated enterprises are subject (when received) to a zero or almost zero tax rate, a complete tax exemption, or a preferential tax regime.
HALLMARKS NOT SUBJECT TO THE MPT
- Payments to an associated stateless enterprise or an associated enterprise in a blacklisted jurisdiction
- The same asset is subject to depreciation in more than one jurisdiction
- Multiple claims for double tax relief
- Transfer of assets with a material difference in the price used for tax purposes
- Circumvention of EU legislation or any equivalent agreements on the automatic exchange of financial account information
- Non-transparent legal or beneficial ownership chains
- Unilateral transfer pricing safe harbour rules
- Transfers of hard-to-value intangibles
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