New EU Tax Disclosure Requirements: the Rules and their Impact on Ukraine
On 25 June 2018 the new EU Directive 2018/822 of 25 May 2018 (the “Directive”) amending Directive 2011/16/EU with regard to mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (the “DAC”) came into force. The Directive makes up the sixth amendment to the DAC and, therefore, is sometimes referred to as “DAC 6”. The Directive is part of the European Commission’s aim to accommodate new initiatives in the field of tax transparency in the EU and combat aggressive tax planning.
In a nutshell, the Directive establishes (i) mandatory disclosure obligations for intermediaries, such as lawyers and tax advisors or, in certain cases, taxpayers in respect of certain cross-border tax arrangements, and (ii) an obligation for the EU member state to exchange reportable information with other member states. The scope of reportable arrangements is very broad and it appears that the intermediaries and taxpayers (both corporate and individuals) will be required to disclose a wide range of information, including on standard commercial arrangements with no tax benefit motivation.
The above development, despite being primarily focused on EU residents (both individuals and companies) will also have an effect on Ukrainian residents. In particular, the new rules will need to be minded by those businesses that use companies in the EU jurisdictions in their corporate groups (both for holding and trading purposes). Furthermore, the development will need to be particularly minded by Ukrainian lawyers, auditors, tax and corporate consultants to the extent of their advisory mandates, for both Ukrainian and EU clients, touch upon EU matters.
Tax avoidance disclosure regimes were introduced in the past in numerous countries, including the US, UK and Ireland. Inspired by such regimes, particularly the UK’s Disclosure of Tax Avoidance Schemes (DOTAS) rules (pursuant to the statistical information, 925 of the 2,366 avoidance schemes disclosed by 2013 under the DOTAS rules were closed by legislation), and responding to Action 12 (Mandatory Disclosure Rules) of the OECD’s Base Erosion and Profit Shifting (BEPS) project, it took less than a year for the Directive to be enacted.
Thus, on 21 June 2017 the European Commission presented its Proposal for a Council Directive amending the DAC, and on 25 May 2018 the Directive was adopted by the Economic and Financial Affairs Council (ECOFIN). The text of the Directive was published in the Official Journal of the EU on 5 June 2018.
When will the rules start to apply?
EU member states shall transpose the Directive into their domestic legislation by 31 December 2019. In so doing, member states will also need to develop the compliant provisions and set out a precise scope of requirements to achieve the objectives of the Directive. Such discretion may potentially result in significant divergence in the scope of reportable arrangements across different EU member states and lead to situations when a particular arrangement might be reportable in one country but not reportable in another.
The new domestic regimes in EU member states will come into effect from 1 July 2020; and the first notifications will be made in August 2020. Importantly, the notifications shall be made in respect of arrangements implemented on or after 25 June 2018. This means that both intermediaries and taxpayers should monitor and keep the details of the potentially reportable arrangements the first step of which occurred between 25 June 2018 and 1 July 2020. At present, in the absence of any guidelines and implemented rules, this may be a challenging task.
The first exchange of information between EU member states shall take place by 31 October 2020.
What is reportable?
The reporting requirements under the Directive apply to “reportable cross-border arrangements”.
An arrangement or series of arrangements, comprising of one or more steps, shall be considered a “cross-border arrangement” if (i) the arrangement concerns either (a) at least two EU member states or (b) an EU member state and a third country, and (ii) at least one of the following conditions is met:
not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
at least one participant in the arrangement is simultaneously a resident for tax purposes in more than one jurisdictions;
at least one participant in the arrangement carries on business in another jurisdiction through a permanent establishment (“PE”) situated in that jurisdiction and the arrangement forms part or the whole of the PE business;
at least one participant in the arrangement carries out an activity in another jurisdiction without being resident for tax purposes or creating a PE situated in that jurisdiction; or
the arrangement has a possible impact on the automatic exchange of information or the identification of a beneficial ownership.
At the same time, the term “arrangement” is not defined by the Directive. This fact may potentially lead to the divergent implementation of such term in various EU member states.
An arrangement qualifying as “cross-border arrangement” becomes reportable if it satisfies at least one “hallmark” listed in the Directive (Annex IV). The “hallmark” is a particular characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance.
The hallmarks are drafted very broadly, so apart from the arrangements which will involve tax schemes, there may also be a requirement to disclose an arrangement with no tax benefit motivation at all.
It should be noted, that the information to be reported shall inter alia include (i) details of the hallmarks being satisfied, (ii) identification details of the intermediaries and relevant taxpayers (including their names and tax residence), (iii) the summary of the arrangement and its value, and (iv) identification of relevant taxpayers or any other person in any member state which are likely to be concerned/affected by the arrangement.
The Directive establishes five categories of hallmarks: generic hallmarks under category A and specific hallmarks under categories B, C (related to cross-border transactions), D (concerning exchange of information and beneficial ownership) and E (concerning transfer pricing).
Many of the hallmarks only apply (and so reporting obligations arise) where it can be established that the main benefit or one of the main benefits of the arrangement is to obtain a tax advantage. This should apply regardless of whether the intended advantage was, in fact, derived. The other hallmarks are not linked to the main benefit test and, therefore, the arrangement shall be reportable irrespective of whether there is any tax advantage to be gained from the arrangement.
Table 1 briefly summarizes the hallmarks with an indication of whether a particular hallmark is linked to the “main benefit test”.
The Directive does not set out any de minimis value for a cross-border arrangement to become reportable. Therefore, the reporting obligations appear to apply regardless of the value of the arrangement. However, it cannot be excluded that EU member states may deal with this when transposing the Directive into their domestic legislation.
Who will report?
Reporting shall be done by “intermediaries” or, if there is no intermediary or the intermediary is protected by privilege, by the “relevant taxpayer”.
The term “intermediary” is defined very broadly and means any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement. It also includes any person that, having regard to the relevant facts and circumstances and based on available information and the relevant expertise and understanding required to provide such services, 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 designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement.
In practice, the intermediaries will include inter alia law firms, accounting firms, corporate services providers, banks, investment advisory firms, consultants, etc.
In order to be qualified as an intermediary, a person shall also meet at least one of the following additional conditions:
be resident for tax purposes in an EU member state;
have PE in a member state through which the services with respect to the arrangement are provided;
be incorporated in, or governed by, the laws of a member state; or
be registered with a professional association related to legal, taxation or consultancy services in a member state.
When implementing the Directive, each member state may give intermediaries the right to waiver from reporting obligations in case the reporting obligation could breach legal professional privilege under the national law of that member state. In this case, such an intermediary will be required to notify about this any other intermediary involved. In the absence of any other intermediaries, the reporting obligation falls to the relevant taxpayer.
Also, an intermediary may be exempt from its reporting requirements if it can provide evidence that another intermediary has reported the arrangement.
The reporting obligation shall fall to the “relevant taxpayer”, if there is no intermediary or the intermediary is protected by privilege. The “relevant taxpayer” shall be understood 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 has implemented the first step of such an arrangement.
Are there penalties for failure to report?
The Directive does not provide for particular penalties, or their types, for non-compliance (by intermediaries or taxpayers) with reporting requirements and allows member states to decide on this. Thus, the Directive sets out that the penalties will be established by member states and such penalties shall be “effective, proportionate and dissuasive”; no further guidance is provided in this respect.
In view of the above “freedom” in establishing penalties, certain member states may possibly establish various non-monetary penalties, such as invalidity of arrangements for tax purposes, prohibition on providing regulating services, etc.
Do the rules have impact on Ukrainian taxpayers?
Although the reporting obligations under the Directive apply to EU intermediaries and taxpayers, the Directive may still have an indirect impact on Ukrainian taxpayers. In particular, this may be the case when an EU intermediary, which is not protected by legal privilege and, therefore, bears a reporting obligation, designs, markets, organises or makes available for implementation or manages the implementation, of a reportable cross-border arrangement for a Ukrainian taxpayer.
Another example of such impact may be the case when a Ukrainian taxpayer enters into a reportable cross-border arrangement with a EU-member counterparty. In such case the arrangement should be reported by the EU taxpayer. The Directive may also have an impact on the Ukrainian subsidiaries of EU companies, which as a result of enacting the Directive would have to consider their arrangements, and their business in Ukraine might possibly be affected because of that.
In any case, the implementation of the Directive by EU member states and development of further guidelines will shed more light on the new rules and their impact on Ukrainian taxpayers.
is an associate at Wolf Theiss