The Cooperation with Other Jurisdictions on Tax Matters (Amendment) Regulations 2019 were recently amended in order to transpose a Council Directive on the mandatory automatic exchange of information in taxation in relation to reportable cross-border arrangements.
The amendments complement the series of legislative acts that were passed by the EU over the previous years in implementation of some of the conclusions in the context of the BEPS project of the OECD/G20 and the work of the Global Forum in the field of transparency.
The main aim remains the curbing of tax evasion and avoidance through capturing aggressive tax planning schemes.
The amendments generally envisage that potentially aggressive cross-border tax planning schemes be disclosed to the authorities, however, the regulations do not presume the existence of tax avoidance. Nonetheless they are coupled with exchange of information.
The disclosure should give the authorities the opportunity to investigate these schemes and reach a conclusion on whether those should be acceptable or not. The ultimate aim is to discourage the availability of such schemes for taxpayers altogether.
In addition, the disclosure is coupled with a system for the automatic exchange of the disclosed data among tax authorities. This element comes on top of the OECD Action 12, which is limited to the disclosure of data. It is also worth mentioning that this initiative is meant to cover gaps in the CRS of the Global Forum, as it broadly applies within the Union under the Administrative Cooperation Directive (DAC). On the consequences of non-reporting/penalties, the envisaged initiative treats this area as falling within the sovereign control of Member States.
Taxpayers are rarely experts in the company or tax law of all jurisdictions which they use in structuring their business in a tax efficient way. They usually rely on intermediaries who assist them in the design of the most appropriate structure. These intermediaries include consultants, lawyers, financial (investment) advisers, accountants, solicitors, financial institutions, insurance intermediaries, and company-formation agents.
Intermediaries advise clients on structuring their business to reduce tax-related costs, and they receive a premium fee as remuneration. It is also common that intermediaries design and/or market certain standard schemes to more users/clients. In this way, they make a profitable business out of facilitating tax optimisation, which sometimes may carry the characteristics of aggressive tax planning and lead to the avoidance of tax. The role of intermediaries in this process is of primary importance and the lack of disincentives only facilitates their behaviour.
The main purpose of setting penalties is a deterrence
The lack of transparency facilitates activities of certain intermediaries involved in promoting and selling aggressive tax planning schemes. As a consequence of this, member states suffer from the shifting of profits, which would otherwise be generated and become taxable in their territory, towards low-tax jurisdictions and often experience an erosion of their tax bases. In addition, such a situation should be expected to give rise to conditions of unfair tax competition against businesses that refuse to engage in these illegitimate activities. The ultimate outcome is to distort the operation of the internal market.
The disclosure requirements would be limited to the domestic territory and therefore only deal with a single fragment of a cross-border scheme. In fact, such schemes usually involve numerous companies with tax residence in a variety of jurisdictions.
Intermediaries will have to report any cross-border tax planning arrangement that they design or promote if it bears any of the features or ‘hallmarks’ defined in the regulations. They must make this report to their tax authorities within five days of giving such an arrangement to their client. Member states must ensure proper penalties are in place for intermediaries that fail to meet these reporting requirements.
These hallmarks are features or characteristics in a transaction that could potentially enable tax avoidance or abuse. Examples of these hallmarks include arrangements which: involve a cross-border payment to a recipient resident in a no-tax country; involve a jurisdiction with inadequate or weakly enforced anti-money laundering legislation; are set up to avoid reporting income as required under EU transparency rules; circumvent EU information exchange requirements for tax rulings; have a direct correlation between the fee charged by the intermediary and what the taxpayer will save in tax avoidance; ensure that the same asset benefits from depreciation rules in more than one country; enable the same income to benefit from tax relief in more than one jurisdiction; and do not respect EU or international transfer pricing guidelines.
It should be expected that the mandatory disclosure of potentially aggressive tax planning schemes would dissuade intermediaries from designing and marketing such schemes. When the national tax authorities receive information, they can take appropriate action to ensure that their tax legislation is sufficiently developed to tackle the disclosed schemes.
Furthermore, dissuasive penalties in case of non-compliance are of high importance in ensuring an effective mechanism. Monetary sanctions are the most common, while some countries combine this with non-monetary sanctions. The main purpose of setting penalties is a deterrence.
As far as more material sanctions for intermediaries involved in aggressive tax planning schemes, such as sanctions within professional regulation or increased publicity are concerned, it should be left to the national level to deal with.
Franklin Cachia is a senior manager tax and regulated industries at CSB Group.