EU tax avoidance directive – DAC6 – HMRC, Hallmarks, CRS & MDR
Both the Panama & Paradise Papers have acted as a shot in the arm for those calling for greater tax transparency. Initially, the UK looked as though it would act unilaterally (as with the Diverted Profits Tax) as it opened a consultation in to proposed disclosure requirements to notify regarding offshore structures.
There are essentially two strands:
- Common Reporting Standards (“CRS”) avoidance and other structures: these took the form of the Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures (“MDR”) which took effect from March 2018. Member States have discretion around implementing these rules.
- EU tax avoidance directive – DAC6: These rules are mandatory and are aimed at a much wider range of activities than MDR. It should be noted that the recent Finance Act included the relevant enabling legislation allowing the Govt to provide for DAC6 through secondary legislation.
This article concentrates on the second of these – the EU Tax Avoidance Directive.
EU Tax Avoidance Directive – what is it?
The EU Tax Avoidance Directive creates a requirement for intermediaries to disclose information relating to certain cross-border tax arrangements.
This information needs to be disclosed to the relevant tax authorities in their own jurisdiction.
Who is an intermediary?
An ‘Intermediary’ is any person that designs, markets, organises or makes available for implementation a reportable cross-border arrangement.
An intermediary could be an individual or Company.
Example of potential Intermediaries might include accountants, tax advisers, corporate finance advisers, lawyers and bankers, etc).
However, in some circumstances, the disclosure requirement would fall on the taxpayer. One such example might be where the only intermediary is protected from having to make disclosure due to legal professional privilege.
When is the EU Tax Avoidance Directive effective from?
The EU Tax Avoidance Directive is alreadyin force. It essentially came into force on 25 June 2018.
The UK enacting legislation must be in place by 1 July 2020 with the first reports being due by 31 August 2020.
The rules are retroactive in the sense that those first reports must include arrangements entered in to between 25 June 2018 and 1 July 2020.
As such, Intermediaries who are within the ambit of these rules should be keeping records of relevant transactions.
EU Tax Avoidance Directive – Hallmarks
A cross border arrangement will be reportable where the arrangement meets one of the 5 specified hallmarks.
Some of the categories are only reportable where the arrangement satisfies a ‘main benefit test’. That is, the that 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.
Other hallmarks do not require the application and satisfying this main benefit test.
Hallmarks that always require satisfaction of ‘main benefit test’
These are generic hallmarks that take in arrangements such as:
- Contingent feescalculated on the basis of a tax advantage
- Include confidentiality conditions; or
- Are standardised schemesoften referred to as ‘plug and play’.
These are specific hallmarks that refer to specific types of schemes. These include:
- certain loss buying schemes;
- arrangements aimed at converting income into capital; and
- circular transactionsthat lack any commercial purpose.
Hallmarks that may or may not be subject to the main benefit test
Rather helpfully (!), some of the Category C hallmarks are subject to the main benefit test and others are not.
Examples of the hallmarks under Category C include:
- Claims for deductions for depreciationin multiple jurisdictions; and
- A claim for double tax relief in respect of the same item of income or capital in more than one jurisdiction.
Some of the category C hallmarks are also subject to the MBT, for example, deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax.
Hallmarks not subject to the main benefit test
These hallmarks refer to arrangements which are perceived to undermine the automatic exchange of information rules. This includes where the arrangement also seeks to take advantage of the absenceof such rules.
Further, this hallmark will also take in offshore structures that obscure the real beneficial ownership of the structure or assets.
This hallmark specifically relates to transfer pricing including:
- the use of unilateral safe harbours;
- the transfer of hard-to-value intangible assets; and
- the projection of future cash flows or income are highly uncertain.
EU Tax Avoidance Directive and Brexit
What about the B-word? What effect will this have on the EU Tax Avoidance Directive. After all, it was all about taking control of our laws right?
It is anticipated that the EU Tax Avoidance Directive will be implemented regardless of Brexit as we are already in to the transitional period.
However, if negotiations are not resumed and the UK leaves the EU without any agreement/transitional period then there must be question marks over whether the directive is fully implemented. That said, the UK clearly has the appetite to act in this area as it was already consulting on these issues ahead of DAC6.
EU Tax Avoidance Directive – Penalties and sanctions
It is envisaged that the enacting legislation introduced by each Member State will also adopt a proportionate penalty regime. This could also include non financial penalties.
Interaction with existing UK tax avoidance legislation
Clearly, the UK already has a plethora of tax avoidance measures including:
- Disclosure of Tax Avoidance Schemes (“DOTAS”)
- Promoters of Tax Avoidance Schemes (“POTAS”)
- Enablers of Defeated Tax Avoidance Schemes
- The General Anti-Abuse Rule(“GAAR”)
- Professional Conduct Rules in Relation to Taxation (“PCRT”)
These already impose disclosure obligations on both the intermediary and the taxpayer as well as a framework of penalties.
The UK also has the spiky Accelerated Payment Notice (“APN”) legislation which – for example – requires the users of DOTAS schemes to cough up any disputed tax on the issue of the APN. It would seem an obvious step for the Government to extend APNs to disclosures
An issue with this is that the EU Tax Avoidance Directive is cast extremely wide and we wait and see whether it will be narrowed by each Member States enacting legislation and / or guidance.
The problem here, as was originally the case with DOTAS, was that an ‘if in doubt, disclose’ mentality may creep in towards disclosure. The fact that the disclosure under DOTAS became a trigger for APN’s further down the line left many promoter and taxpayer with plenty of regret!
The full impact of the EU Tax Avoidance Directive cannot yet be measured as it is up to individual Member States to enact the precise legislation and any appropriate guidance. It remains to be seen whether these rules become more focused on the ‘aggressive’ tax planning they are aimed at.
The rules are much wider than that at the moment.
Any person those who are involved in cross-border structuring, are potentially already under an obligation to record transactions and disclose them in 2020. Some of the hallmarks do not require transactions to satisfy the Main Benefit Test so tax may not be at the forefront of all Intermediaries and taxpayer’s minds.
As such, there is currently a danger that these rules might be inconsistent with EU rules around proportionality.
We await the enacting legislation of the Member States and any other additional guidance to see whether these undoubtedly widely cast anti-avoidance rules will be narrowed.
If you have any queries regarding the EU Tax Avoidance Directive or any other international tax matters then please get in touch. Read more about VAT below…