On 1 July 2020, mandatory disclosure rules aimed at deterring potentially aggressive cross-border tax planning arrangements will come into force in all EU Member States. Each Member State’s rules are derived from Directive 2011/16/EU, as amended by Council Directive (EU) 2018/822 of 25 May 2018 (also known as DAC6), and are modelled along the lines of Action 12 of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting project.
Under the new rules, EU-based intermediaries will be required to disclose all “reportable cross-border arrangements” (RCBAs) implemented at any time between 25 June 2018 and 1 July 2020 to the tax authority of their home Member State by 31 August 2020 at the latest. All potentially affected taxpayers should start collecting data on their RCBAs now, so that they or an appropriate EU intermediary can disclose them on time. Any RCBAs implemented after 1 July 2020 must be disclosed to the relevant tax authority within 30 days beginning on the day after the RCBA is made available for implementation.
This article focuses on how these rules are expected to work from a UK perspective. Other EU jurisdictions may differ in their approach and interpretation.
Who must disclose?
If there is an RCBA, an EU intermediary must report it to the relevant tax authority of its home Member State, unless the intermediary is exempted by legal professional privilege or has obtained evidence (such as an RCBA reference number) that another EU intermediary has made a report. “Intermediaries” for these purposes can be broadly divided into two categories: promoters and service providers. Intermediaries are typically accountancy firms, law firms, tax advisory firms or corporate services firms, although this is by no means an exhaustive list, and each case will depend on its own facts.
If no intermediary is available to make the report (for example, because there is no intermediary at all, because none of the intermediaries have an EU nexus, or because the intermediaries are protected by legal professional privilege under their home country’s rules), the disclosure obligation falls on the relevant taxpayer (i.e., the taxpayer to whom an RCBA is made available for implementation). If the relevant taxpayer is in the United States, the disclosure will need to be made by an EU affiliate that is a party to the RCBA.
What happens if there are multiple intermediaries?
Where there are multiple EU intermediaries not covered by legal professional privilege, the intermediaries will need to determine which one should make the disclosure. In practice, the “promoter” of the RCBA (namely, the party which designs, markets, organises, makes available for implementation or manages the implementation of the RCBA) generally would be the intermediary with the primary reporting obligation, as it is more likely to have the requisite knowledge of the RCBA.
If service providers (i.e., those who provide aid, advice or assistance in relation to the design, marketing, organisation or implementation of the RCBA) can provide evidence that they did not know or could not reasonably be expected to know that they were involved in an RCBA, they will be exempt from reporting.
How are disclosures made?
Administrative requirements surrounding reporting obligations, including legal professional privilege exemptions and penalties for non-disclosure, will be subject to the DAC6 implementing laws of the reporting intermediary’s home Member State (or, if there is no reporting intermediary, the home Member State of the relevant taxpayer). Specific advice therefore should be taken on the DAC6 requirements of the Member State concerned.
The UK implementing regulations and related HMRC guidance are currently in draft form. Further updates will be forthcoming if the final regulations and guidance differ materially from the draft version.
Where must an RCBA be disclosed?
An RCBA must be disclosed to the tax authority of the EU Member State in which the intermediary is tax resident, incorporated or established, or registered with a professional association, or in which it has a permanent establishment (PE). If there is no reporting intermediary, the RCBA must be disclosed to the tax authority of the EU Member State in which the relevant taxpayer is resident, in which it has a PE, or in which it receives income/profits or carries on an activity. These concepts may give rise to practical difficulties concerning nexus, and specific advice should be sought on a case-by-case basis.
What must be disclosed?
All RCBAs must be disclosed. An RCBA is, broadly, an arrangement or series of arrangements involving at least one EU Member State in which one or more of the participants conducts activities in more than one jurisdiction (whether by virtue of residence, a PE or otherwise) and which contains at least one of the prescribed risk indicators of tax avoidance, known as “hallmarks”.
What are the hallmarks?
Arrangements with any one or more of the following hallmarks must also have a main benefit of obtaining a tax advantage anywhere in the world in order to be disclosable. Thus, an arrangement may be discloseable even if the intended tax advantage is in relation to US taxation. These hallmarks are broadly summarised below, and further advice will need to be taken on the applicability of each one:
A condition that the arrangement must be kept confidential from tax authorities or competitors
A fee that is charged by reference to the presence or absence of a tax advantage
A need to have substantially standardised documentation without any need for substantial customisation
Conversion of taxable revenue into lower-taxed or tax-exempt revenue categories (including capital)
The purchase then discontinuation of a loss-making company purely to utilise those losses to shelter group taxable profits
Circular transactions involving the round-tripping of funds
Deductible cross-border payments between associated enterprises where the recipient is either subject to tax at a rate of zero or “almost zero” (which the United Kingdom views as being a rate of 1% or less), or benefits from an exemption or a preferential regime such as a patent box.
Arrangements with any one or more of the hallmarks summarized below need not have a main benefit of obtaining a tax advantage in order to be disclosable:
Deductible cross-border payments between associated enterprises where the recipient either has no tax residence or is resident in a non-EU country that the European Union or OECD deems to be non-cooperative
Deductions for the same item of depreciation claimed in more than one jurisdiction
Double tax relief claimed in more than one jurisdiction
Asset transfers where there is a material difference in the amount of consideration for relevant tax purposes between the jurisdictions involved
Arrangements aimed at circumventing the requirements of the Common Reporting Standard
Arrangements which involve non-transparent structures that have the effect of making beneficiaries unidentifiable
Unilateral safe harbour rules (in a transfer pricing context)
Transfers or licenses of hard-to-value intangibles, such as patents
A business transfer that reduces a transferor’s projected three-year EBIT by more than 50%.
Doesn’t this mean that purely commercial transactions may be discloseable?
Some of these hallmarks may mean that ordinary commercial transactions are caught by the rules, even when there is no intended tax advantage, simply because the EU Commission perceives them (rightly or wrongly) to be inherently risky from a tax avoidance perspective. This is particularly true of the transfer pricing hallmarks listed in the last three bullets above. Further advice should be sought on the applicability of any of these hallmarks to the facts of a specific transaction.
When does an RCBA need to be disclosed?
All RCBAs implemented between 25 June 2018 and 1 July 2020 must be disclosed to the relevant tax authority by 31 August 2020, with RCBAs implemented after that date to be disclosed within 30 days beginning on the day after the RCBA is made available for implementation. A standard form to be used for the disclosure will be made available in due course.
What happens to the RCBA after a disclosure is made?
All disclosed RCBAs go to a secure central directory run by the EU Commission. These are then automatically exchanged with tax authorities of all other Member States within one month of the quarter end in which the disclosure was made. The first such exchange is set to take place by 31 October 2020. The information exchange mechanism is designed to deter aggressive tax planning practices by allowing Member States to examine the RCBA data and check whether their tax base is being eroded by means of aggressive cross-border tax avoidance schemes, and to take action where necessary. The fact that a tax authority does not react to an RCBA does not mean that it has accepted its validity or the tax treatment thereof.
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