The new reporting obligation on intermediaries and relevant taxpayers for international transactions with potentially aggressive tax planning arrangements

In accordance with action 12 of the BEPS Action Plan, this is the latest initiative on tax transparency across the EU and its direct aim is (i) for the tax authorities of the Member States to obtain complete information on so called “potentially aggressive tax arrangements” and (ii) for this information to be exchanged among those states.

The Council takes the view that by having that information, national tax authorities will be able to react promptly against harmful tax practices and clamp down on tax avoidance and evasion in the internal market. Moreover, placing the obligation on “intermediaries” (advisors, marketers, etc.) or, if there is a legal professional privilege, on the beneficiary taxpayers themselves (who must be identified), is expected to achieve a dissuasive effect in its implementation.

After defining as “hallmarks” the characteristics or features of a cross-border arrangement that presents an indication of a potential risk of tax avoidance, the Directive categorizes and lists the reportable transactions in the Annex, stating that in all cases they should have a cross-border dimension, in other words, affect more than one Member State or one Member State and a third country.

The Directive comes into force on June 25, 2018, although its provisions start to apply on July 1, 2020. This means that on June 25, 2018, parties with reporting obligations must collect and store the information in question to be able to comply with their obligations when the date of application arrives.

To enable compliance, the Member States should –by December 31, 2019– adopt and publish the necessary provisions, among which the Directive expressly requires the Member States to lay down penalties that are “effective, proportionate and dissuasive”.

1. PARTIES WITH REPORTING OBLIGATIONS

The Directive makes the reporting obligation lie firstly with the “intermediary” and, secondarily, with the “relevant taxpayer”, and these categories are defined as follows:

• “Intermediary”:

• “Relevant taxpayer”: 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.

1. Absence of an intermediary, because the intermediary is outside the EU or because there is no intermediary as such because the reportable cross-border arrangement has been designed and implemented internally by the relevant taxpayer.
2. Existence of a national provision relieving the intermediary from the reporting obligation, on the basis of a legal professional privilege. In this case, the intermediary must notify its obligations to the other intermediaries with reporting obligations and, if there are no such intermediaries, to the relevant taxpayer. The scope of the professional privilege should be defined under the legislation of every Member State.

• More than one intermediary: the reporting obligation lies with all of them individually.
• More than one relevant taxpayer: the reporting obligation lies with the relevant taxpayer that agreed the reportable cross-border arrangement with the intermediary or, in the absence of that taxpayer, with the relevant taxpayer that manages the implementation of the arrangement.

2. REPORTABLE ARRANGEMENTS

In all cases the reportable arrangements must have a cross-border dimension. For these purposes, the Directive defines “cross-border arrangements” as those involving more than one Member State or a Member State and a third country where at least one of the following conditions is met:

1. not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
2. one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
3. one or more of the participants in the arrangement carries on business in another jurisdiction through a PE situated in that jurisdiction and the arrangement forms part or the whole of the business of that PE;
4. one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a PE situated in that jurisdiction;
5. such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

3. REPORTABLE INFORMATION

After reportable cross-border arrangements have been identified, the information that must be sent to the tax authority concerned is as follows, as applicable:

• Identification and full particulars of the intermediaries and of the relevant taxpayers;
• Details of the hallmarks set out in the Annex that make the cross-border arrangement reportable;
• Summary of the content of the reportable arrangement;
• Date on which the first step in implementing the reportable cross-border arrangement was, or will be, made;
• Details of the national provisions that form the basis of the reportable cross-border arrangement;
• Value of the reportable cross-border arrangement;
• Identification of the Member State of the relevant taxpayer;
• Identification of any other person or Member State likely to be affected by the reportable arrangement.

This information must be reported on a standard form that should be approved for these purposes by the competent authority in each Member State.

The Directive authorizes the Member States to adopt the necessary measures to require that each relevant taxpayer file information about their use of the arrangement in each of the years for which they use it.

The Member States are required to share the information they receive with the tax authorities in other Member States, by means of an automatic exchange, in relation to which the Commission should only be granted access to a sufficient amount of that information to enable it to monitor the proper functioning of the Directive.

Lastly, in an important clarification, the Directive expressly specifies that if a tax authority in a Member State fails to react to a reported arrangement, this cannot ever imply that the State concerned accepts the validity or tax treatment of that arrangement.

4. MULTIPLE REPORTING OBLIGATION

Where the intermediary has an obligation to file information in more than one Member State, that information only has to be filed in the State that features first in the following list:

1. the Member State where the intermediary is resident for tax purposes;
2. the Member State where the intermediary has a PE through which the services with respect to the arrangement are provided;
3. the Member State where the intermediary is incorporated or governed by its laws;
4. the Member State where the intermediary is registered with a professional association related to legal, taxation or consultancy services.

Whereas if a relevant taxpayer has an obligation to file information with more than one Member State, that information only has to be filed in the Member State that features first in the list below:

1. the Member State where the relevant taxpayer is resident for tax purposes;
2. the Member State where the relevant taxpayer has a PE benefiting from the arrangement;
3. the Member State where the relevant taxpayer receives income or generates profits, although the relevant taxpayer is not resident for tax purposes and has no PE in any Member State;
4. the Member State where the relevant taxpayer carries on an activity, although the relevant taxpayer is not resident for tax purposes and has no PE in any Member State.

In all cases involving a multiple reporting obligation in more than one jurisdiction, the intermediary or the relevant taxpayer are exempt from filing the information if they have proof that the same information was filed in another Member State.

5. REPORTING TIMEFRAMES

The intermediaries and relevant taxpayers with a reporting obligation must file the information with the competent authorities within 30 days, beginning on whichever of the following dates occurs first:

• the day after the arrangement is made available for implementation; or
• the day after the arrangement is ready for implementation; or
• when the first step in the implementation of the arrangement has been made.

For their part, the intermediaries that provide aid, assistance or advice with respect to designing, marketing, organizing, making available for implementation, or managing the implementation of, a reportable cross-border arrangement, must notify it within 30 days beginning on the day after they provided aid, assistance or advice, directly or by means of other persons.

In the case of “marketable arrangements”, intermediaries should be required to make a periodic report every three months, providing an update of previously reported information.

6. PENALTIES

The Directive does not specify the penalty terms to be laid down in the event of failure to comply with its provisions, instead it allows the Member States to determine the specific contours, by requiring them to take the necessary measures to ensure that its provisions are enforced.

The Directive’s guidance in this respect is that the penalties laid down by the Member States should be “effective, proportionate and dissuasive”.

7. ENTRY INTO FORCE

LThe date of entry into force of the Directive is June 25, 2018 and the Member States must transpose it by December 31, 2019.

The provisions in the Directive must be applied from July 1, 2020, when the Member States are to exchange information every quarter through a secure central directory. So the first exchange of information will take place on October 31, 2020.

A kind of retroactive effect has also been provided in relation to reportable cross-border arrangements where the first step of the arrangement was implemented between June 25, 2018 and July 1, 2020, which the intermediaries or relevant taxpayers must report by August 31, 2020.