EU Finance Ministers Reached Agreement on Reporting Obligation on Cross-border Tax Arrangements
On 13 March 2018, the European Economic and Financial Affairs Council (ECOFIN) reached agreement on a proposal aimed at boosting transparency in order to tackle cross-border tax planning. The Council will adopt the respective draft Directive without any further discussion during a following meeting of the ECOFIN Council.
European member states will have until 31 December 2019 to transpose it into national laws and regulations. The new reporting standards will apply from 1 July 2010, whereby member states are obliged to exchange information every three month. The first automatic exchange of information will be completed by 31 October 2020. Nevertheless, the directive will already effect all transactions /arrangements entered into force 20 days after the directive’s publication the Gazette of the European Union.
Broadly reflecting the OECD’s 2013 action plan to prevent tax base erosion and profit shifting (BEPS AP 12), the draft directive will require so-called intermediaries such as tax advisors, accountants, lawyers and taxpayers that design and/or promote tax planning schemes to report schemes that are considered potentially aggressive.
Intermediaries are defined as any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement.
Intermediaries may only be entitled to a waiver from filing information on a reportable cross-border arrangement where the reporting obligation would breach the legal professional privilege under the national law of the respective member state. In such a case other intermediaries who may be involved and/or taxpayers themselves have to fulfill the information obligation.
During the preceding ECOFIN meetings Germany already announced that lawyers , tax advisors and auditors could make use of the legal professional privilege.
Whether a cross-border arrangement would lead to a reporting obligation depends on the containment of at least of certain hallmarks, i.e. characteristics or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance as listed in Annex IV to the draft directive. These could be generic or specific hallmarks, and will only be regarded if the respective cross-border arrangement fulfills the so-called main benefit test. The test will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
Generic hallmarks i.a. comprise of such models or arrangements where the taxpayer of a participant in the arrangement undertakes to comply with a condition of confidentiality which may require them not to disclose how the arrangement could secure a tax advantage vis-à-vis other intermediaries or the tax authorities. Furthermore, arrangement where the intermediary is entitled to receive a fee for the arrangement and this fee is agreed upon with reference to the amount of the tax advantage derived from such arrangement are also covered by the draft directive.
Certain specific hallmarks linked to the benefit test cover cross-border arrangements whereby i.a.
- a participant in the arrangement takes contrived steps which consists in acquiring loss-making company using its losses in order to reduce its tax liability
- is has the effect of converting income into capital, gifts or other categories of revenue which are tax at a lower level or exempt from tax
- it includes so-called circular transactions resulting in round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features
- it involves deductible cross-border payments made between tow or more associated companies
- deductions for the same depreciation on the asset are claimed in more than one jurisdiction
Specific hallmarks concerning transfer pricing, such as
- an arrangement which involves the use of unilateral safe harbor rules
- arrangements involving the transfer of so-called hard-to-value intangibles, whereby
- no reliably comparables exist, and
- at the time of the transaction the projections of future cash-flows or income expected to be derived form the transferred intangible, or the assumptions used in valuing the intangible highly uncertain, making if difficult to predict the level of ultimate success of the intangible at the time of the transfer
- arrangements involving an intra-group cross-border transfer of functions and/or risks and/or assets, if
- the projected EBIT, during the last three-year period after the transfer, of the transferor, are less 50% of the projected annual EBIT of such transferor if the transfer had not been made
In a first step, taxpayers and/or intermediaries have to file information about the covered cross-border arrangements with the competent authorities within 30 days.
Member states are required to quarterly report and automatically exchange the received information with other members states involved.
The member states are obliged to foresee rules on penalties applicable to infringements of information obligation. The penalties shall be effective, proportionate and dissuasive.
The draft directive could be found at: http://data.consilium.europa.eu/doc/document/ST-6804-2018-INIT/en/pdf
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Stefan im Schlaa