The EU Directive on mandatory disclosure rules, formally known as Council Directive (EU) 2018/822 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 "Directive"), requires Member States to implement legislation that obliges intermediaries and taxpayers to report tax arrangements that meet certain "hallmarks". Information about these reportable tax arrangements that have been collected by a Member State will be automatically exchanged with other Member States that might have an interest in the arrangements.
When do the rules come into force?
The mandatory disclosure rules entered into force on 25 June 2018. Member States are required to implement national legislation that requires intermediaries and taxpayers to file information about reportable tax arrangements by 1 July 2020. The filing requirement has to commence from 31 August 2020, with the first automatic exchange taking place between Member States from 31 October 2020.
When will information be filed?
The Directive contains a catch-up provision aimed at cross-border arrangements the first step of which was implemented between the date of entry into force of the Directive (25 June 2018) and the date of its application (1 July 2020). Information about reportable arrangements entered into during this period would need to be filed, at the latest, by 31 August 2020. After the initial catch up phase, there is a general requirement for information to be filed within 30-days of an intermediary or a taxpayer coming into contact with a reportable arrangement. The action that may trigger this 30-day countdown is defined very broadly in the Directive - for example, an intermediary providing advice can trigger a reporting obligation (whether or not the advice is implemented).
What is the penalty for non-compliance?
Non-compliance with the Directive will very likely entail imposition of penalty, a matter which has been left to the discretion of the Member States. The Directive stipulates that the penalty shall be 'effective, proportionate and dissuasive.'
What types of tax arrangements are covered?
Tax arrangements involving a wide range of taxes are covered. The Directive brings into scope arrangements dealing with taxes of every kind, except VAT, Customs and Excise, and social security contributions.
However, only cross border arrangements that involve two or more countries and at least one of these countries is an EU Member State are covered by the rules.
Cross-border tax arrangements must also meet at least one of the "hallmarks" identified in the Directive to be reportable.
What are the "hallmarks" that make a cross-border arrangement reportable under the Directive?
There are five categories of such "hallmarks" labelled generic hallmarks, specific hallmarks related to main benefit test, specific hallmarks related to cross-border transactions, specific hallmarks concerning automatic exchange of information and beneficial ownership and specific hallmarks concerning transfer pricing. Overall, there are 19 sub-categories of reportable "hallmarks" covering a wide range of tax arrangements. The reporting obligation is not limited to 'aggressive' tax schemes or deliberate tax avoidance, and could apply to standard transactions with no particular tax motive.
Who has to report?
The Directive casts primary reporting obligation on the intermediaries involved in a reportable cross-border tax arrangement.
The term "intermediary" has been defined in the Directive to include "any person that 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 a reportable cross-border arrangement". This definition is very broad and brings into scope not only intermediaries directly concerned with the rendering of tax planning advice such as tax lawyers and advisers, but also other non-tax advisors who may be indirectly involved in a tax arrangement.
It is also important to note that for the reporting obligation to exist under the Directive, the intermediary must have an EU nexus. Such an EU nexus would exist where an intermediary is tax resident in a Member State, has a permanent establishment in a Member State through which the services with respect to the arrangement are provided, or is incorporated in or governed by the laws of a Member State, or where such intermediary is registered with a professional association related to legal, taxation or consultancy services in a Member State.
Member States are empowered to provide a waiver from the reporting obligation where the advice of an intermediary is protected by legal professional privilege.
What happen when there are multiple intermediaries?
When multiple intermediaries are involved in a reportable arrangement, the reporting obligation will fall on each of them to report information that is within its 'knowledge, possession or control.' However, it is sufficient for only one intermediary to disclose, provided the other intermediaries have proof that the same information has been filed by that intermediary. As a reporting intermediary, DLA Piper will be unable to coordinate our reporting obligation with other intermediaries outside DLA Piper. It is the responsibility of a client to coordinate all these intermediaries who are involved in a reportable tax arrangement.
Do taxpayers have to report?
Although the primary obligation under the Directive falls on the intermediaries, taxpayers may be required to comply with the reporting obligation if there is no reporting intermediary, or if the waiver for legal professional privilege applies to the intermediary. A taxpayer would not be required to report as long as there is at least one reporting intermediary.
Taxpayers who may have reporting obligations under the Directive are broadly defined as 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 who has implemented the first step of such an arrangement.
There is no EU residence connection needed. Taxpayers who are not resident in any of the EU Member States may be required to report if they enter into cross-border tax arrangements that meet at least one of the "hallmarks".
What information has to be reported?
The Directive does not contain any specific rules about information that has to be reported. It does, however, specify that Member States need to collect the following information for the purpose of exchanging with other Member States:
- identity of the taxpayer(s) and intermediaries;
- jurisdictions concerned in the implementation of a cross-border arrangement;
- commercial and business reasons for entering into a cross-border arrangement;
- a summary of the content of the reportable cross-border arrangement, including a reference to the name by which it is commonly known, if any, and a description in abstract terms of the relevant business activities or arrangements, without leading to the disclosure of a commercial, industrial or professional secret or of a commercial process, or of information the disclosure of which would be contrary to public policy;
- the date on which the first step in implementing the reportable cross-border arrangement has been made or will be made;
- the value of the reportable cross-border arrangement;
- the identification of any other person in a Member State likely to be affected by the reportable cross-border arrangement, indicating to which Member States such person is linked.