The intermediary tax disclosure proposals will reinforce EU's tax transparency framework, by shedding new light on the activities of tax intermediaries and promoters of tax planning arrangements
The European Commission has proposed tough new transparency rules for intermediaries - such as tax advisors, accountants, banks and lawyers - who design and promote tax planning schemes. The European Commission's press release formally announced the proposals, amidst extensive speculation over previous weeks of a Europe-wide crackdown on banks, accountants and legal firms that facilitate offshore tax schemes, based on leaked draft legislation.
To explain the proposed tax disclosure regime in a simple fashion, they have even produced a one-minute video.
In the aftermath of the Panama Papers, 'unacceptable' practices by intermediaries had come to light. Intermediaries had been exposed in actively assisting individuals and companies to escape taxation, usually through complex cross-border schemes. The proposals target aggressive tax planning by forcing the disclosure of activities undertaken by tax planners and advisers.
The EU has become the front-runner when it comes to bringing more transparency to the world of aggressive tax planning. This work is already reaping results. Today we are proposing to hold responsible the go-betweens who create and sell tax avoidance schemes. Ultimately, this will result in greater tax revenues for Member States.
Mechanics based on UK DOTAS
The proposals have adopted similar mechanics to UK's Disclosure of tax avoidance schemes ("DOTAS"). Cross-border tax planning schemes bearing certain characteristics or 'hallmarks', which cause a loss to the exchequer, will have to be automatically reported to the respective tax authorities. The European Commission has identified key hallmarks, including the use of losses to reduce tax liability, the use of special beneficial tax regimes, or arrangements through countries that do not meet international good governance standards.
EU member states will automatically exchange the information that they receive on the tax planning schemes through a centralised database, giving them early warning on new risks of avoidance and enabling them to take early measures to block harmful arrangements. The requirement to report a scheme does not necessarily imply that it is harmful, only that it merits scrutiny by the tax authorities. However, member states will be obliged to implement effective and dissuasive penalties for those companies that do not comply with the transparency measures, creating a powerful new deterrent for those that encourage or facilitate tax abuse.
Wide scope of the proposed disclosure regime
The new rules are comprehensive, covering all intermediaries and all potentially harmful schemes across all EU member states. Details of every tax scheme containing one or more hallmarks will have to be reported to the intermediary's home tax authority within five days of providing such an arrangement to a client.
The disclosure obligation
The obligation to report a hallmark cross-border scheme will fall to:
- the intermediary promoting the cross-border scheme for implementation and use by a company or an individual;
- the individual or company receiving the advice, in all cases where the intermediary providing the cross-border scheme is not based in the EU, or where the intermediary is prevented by professional privilege or secrecy rules to make the disclosure;
- the individual or company implementing the cross-border scheme where the scheme is developed by in-house tax consultants or lawyers.
It is conceivable, albeit unlikely, that the UK eschews the proposed intermediary tax disclosure regulations. Given that the UK has been at the forefront of combating tax evasion and promoting international tax transparency and cooperation, it would be odd for the UK not to seek to participate in the arrangement with the other EU member states. Indeed, a key element of UK's CCO for the failure to prevent the criminal facilitation of tax evasion (expected to come into force in September 2017) is the Overseas tax evasion facilitation offence.
Given the political weakness of the recently re-elected Conservative government under Theresa May, a hard exit now looks quite unlikely. If the UK negotiators manage to secure single market access, UK would be subject to the same tax and financial regulation as full members of the EU.
The intermediary tax disclosure proposal, in the form of an amendment to the Directive for Administration Cooperation (DAC), are to be submitted to the European Parliament for consultation and to the Council for adoption. It is expected that the new reporting requirements would enter into force as early as 1 January 2019, with EU member states obliged to exchange information every 3 months thereafter.
Source: Ali Kazimi, Managing Director at Hansuke Consulting