Will intermediaries soon have to disclose aggressive tax planning arrangements?
As part of a range of EU initiatives to tackle tax abuse, the European Commission is considering to introduce Mandatory Disclosure Rules (MDR) for intermediaries designing and promoting potentially aggressive cross-border tax planning arrangements. We consider the issues involved.
Potentially aggressive tax arrangements
On 21 June 2017, the European Commission submitted a proposal for a Council Directive introducing MDR according to which intermediaries would be obliged to report potentially aggressive cross-border tax planning arrangements that they design or promote. The reported information would be automatically exchanged with other member states involved.
A definition of ‘aggressive tax planning arrangement’ is not provided. Instead, a list of features in transactions (referred to as ‘hallmarks’) that could potentially enable tax avoidance or abuse is included. Any cross-border arrangement that contains one or more of the hallmarks listed in the proposal needs to be reported to the tax authorities of the member state by the intermediary.
The commission made the list of hallmarks as wide-ranging as possible to avoid any loopholes. It includes both generic and specific features.
Some examples of specific hallmarks are:
- Situations where the intermediary charge a fixed percentage of the tax avoided as a fee.
- The conversion of income into another type of lower taxed revenue.
- Deductible cross-border transactions based on the residency of the taxpayer.
- The use of jurisdictions with inadequate or weak anti-money laundering rules.
More generally, arrangements that do not conform to the arm’s length principle or to OECD transfer pricing guidelines also need to be reported.
An intermediary is any person who is responsible towards the taxpayer for designing, marketing, organising or managing the implementation of the tax aspects of a reportable cross-border arrangement.
Intermediaries are covered by this proposal if they are (i) incorporated in a member state, (ii) resident for tax purposes in a member state , (iii) based in a member state from where it provides services or (iv) registered with a professional association relating to legal, taxation or consultancy services in a member state.
We understand that tax attorneys-at-law could be seen as ‘intermediaries’ under the proposed rules and therefore would be required to report potentially aggressive tax planning arrangements. But what about the disclosure of advice covered by legal privilege? How can the MDR coexist with the fundamental right to a fair trial (article 6 of the European Convention on Human Rights)?
Intermediaries must report an arrangement within five days of it being made available to the taxpayer for implementation.
In cases where the disclosure is shifted to the taxpayer, the arrangement must also be reported within five days of it being implemented. The reporting obligation switches to the taxpayer in three cases: (i) the intermediary is based outside the EU (ii) there is no intermediary or (iii) the intermediary asserts legal professional privilege.
Member states must ensure that proper penalties are in place for intermediaries that fail to meet the reporting obligations.
Tax authorities from member states will automatically exchange the information they receive with tax authorities from other member states.
Impact in Belgium
We believe that the impact of MDR will be minimal in Belgium as the Belgian legislator has already implemented a range of measures in recent years to combat tax avoidance.
Entry into force
The proposal has been submitted to the European Parliament for consultation and to the Council for adoption.
The proposed rules would apply from 1 January 2019. The first information would need to be disclosed by the end of the first quarter of that year (31 March 2019).
Find out more
For further thoughts on the MDR proposal, please see Christian Chéruy’s article in Amcham Connect.