The Council of the European Union reached agreement on a draft directive aimed at boosting transparency to tackle aggressive cross-border tax planning. The draft 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.
The draft 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 advantaged 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.
Specific hallmark test covered by the main benefit test
Examples of specific hallmark test that only apply if the main benefit test is satisfied, are:
- acquiring a loss-making company and using its losses to reduce the tax liability;
- the conversion of income into another category of revenue taxed at a lower level;
- circular transactions that result in the round tipping of funds;
- deductible cross-border payments that benefit from a full exemption or from a preferential tax regime at the level of the recipient; and
- situations where the recipient of the deductible payment is resident in a jurisdiction that imposes corporate tax at the rate of zero percent or close to zero percent.
Specific hallmark test not covered by the main benefit test
An example of a specific hallmark that does not need to satisfy the main benefit test to apply deals with deductible cross-border transactions where the recipient is either not resident for tax purposes in any jurisdiction or in a jurisdiction included on the EU blacklist. Also an arrangement that results in relief from double taxation in respect of the same item of income or capital in more than one jurisdiction would fall under this test. Other specific hallmarks deal with arrangements that are designed to circumvent automatic exchange of information and beneficial ownership, and certain arrangements concerning transfer pricing.
Automatically exchanged information
Member States will be required to automatically exchange the information they receive through a centralised database. Member States furthermore will have until 31 December 2019 to transpose the provisions of the draft Directive into national laws and regulations. Subsequently, the reporting requirements will apply from July 1, 2020 and Member States will have to exchange information every three months (within one month from the end of the quarter in which the information was filed). The first automatic exchange of information will therefore be completed by October 31, 2020.
