EU Mandatory Disclosure Rules – New reporting requirements for intermediaries
On 9 March 2018, following the G7 communique calling for global tax information exchange, the Organisation for Economic Co-operation and Development (OECD) issued new Model Mandatory Disclosure Rules that require accountants, lawyers, financial advisers, banks and other service providers to inform tax authorities of any schemes they put in place for their clients aiming to avoid reporting under the OECD/G20 Common Reporting Standard (CRS) or prevent the identification of the beneficial owners.
On 25 May 2018, The European Union published an Amendment to the Directive on Administrative Co-operation as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements that will require intermediaries to report certain cross border, tax-planning arrangements to tax authorities. EU Member States’ tax authorities will exchange the information automatically within the EU through a centralised database on a quarterly basis.
When do the obligations begin
Intermediaries will first have to report by 31 August 2020, on any arrangements where the first step has been taken, after the Directive enters into force on 25 June 2018.
Who is covered by the new rules
The Directive applies to any intermediary that designs, markets, organises or makes available for implementation or manages the implementation of, a reportable cross-border arrangement. It also covers those who provide aid, assistance or advice where they can be reasonably expected to know that this is what they have done. If the intermediary is located outside the EU or in the case of client-attorney privilege, the obligation to report passes to the taxpayer.
What is a reportable cross-border arrangement
The intermediaries are required to report any cross-border arrangement (covering all direct taxes) if it bears the "hallmarks" defined in the Directive.
What are the hallmarks
It appears that The Directive has adopted the essence of the British DOTAS legislation. The ‘main benefit’ test will be satisfied if it can be established that the main benefit or 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.
The hallmarks are divided into five categories. Categories A and B relate to the main benefit test. Category C examines cross-border transactions. Category D covers specific hallmarks concerning automatic exchange of information and beneficial ownership. Category E defines the specific hallmarks concerning transfer pricing.
How would the measures work in practice
The intermediaries must report to the relevant tax authority within 30 days of when the arrangement is made available, is ready for implementation or has been implemented – whichever occurs first, or of when the aid, assistance or advice is provided.
Intermediaries are not expected to carry out additional due diligence and will only have to report information which is in their knowledge, possession or control.
What are the penalties for non-compliance
The rules on penalties will be laid down by each Member State on national level. Member States must implement the Directive in their domestic laws ultimately on 31 December 2019 and apply it as from 1 July 2020. However, it will have retroactive effect for all reportable arrangements on and after 25 May 2018.
Conclusion
The mandatory disclosure rules will be a powerful tool to detect taxpayers that refuse to be compliant with their legal obligations to declare assets and income. Intermediaries and their clients should already monitor all tax advice provided with a cross-border dimension and all advice concerning reporting requirements to ensure that a future obligation to report can be properly fulfilled.
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