EU Council adopts directive on mandatory disclosure rules for intermediaries
12/06/18
In brief
On 25 May 2018, the ECOFIN Council adopted a Council Directive to introduce mandatory reporting obligations for intermediaries and taxpayers in relation to cross-border arrangements considered to be potential tax-planning arrangements. EU Member States will automatically exchange such information every quarter.
Romania has until 31 December 2019 to implement such rules in its domestic legislation, but given the inclusion of a retroactive clause, in practice it has to apply these provisions as of 25 June 2018.
In detail
This is actually the sixth amendment of Directive 2011/16/EU on administrative cooperation in the field of taxation. As part of this Directive, there is ongoing automatic exchange of information between EU tax authorities on financial accounts held by non-residents, advance cross-border tax rulings and country-by-country reporting.
What is the purpose of these new rules?
The main purpose is to strengthen tax transparency and the fight against aggressive tax planning.
What triggers a reporting obligation?
The new rules apply only to cross-border arrangements. An arrangement is reportable if it satisfies at least one of the specified criteria (i.e. so called “hallmarks”). Such hallmarks include:
- accelerating the use of losses;
- circular / offsetting /cancelling transactions;
- deductible payments to states with no / almost zero corporation tax or non-cooperative states;
- deductible payments to a recipient that receives a preferential tax regime or a full exemption for the payment;
- use of jurisdictions with inadequate or weak anti-money laundering rules, including those which help to conceal beneficial ownership information;
- the transfer of financial accounts or assets or the use of jurisdictions that are not bound by the automatic exchange of information with the state of the taxpayer.
We note that the hallmarks list is very broad and could give rise to a number of disclosures.
Who needs to disclose?
The reporting obligation may fall on either:
- a qualifying intermediary – any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border transaction or those who provide aid, assistance or advice in relation to such arrangements. According to the EU Commission press release, intermediaries could be firms or individuals, such as tax advisors, accountants or lawyers.
- the taxpayer – in cases where the intermediary is entitled to legal professional privilege or a qualifying intermediary is absent (including wholly ‘in-house’ schemes). In the first case, the intermediary still has to notify the taxpayer of this obligation.
When should information be disclosed?
The information should be disclosed within 30 days, starting on the day after the arrangement is available or is ready for implementation to the taxpayer or when the first step of such arrangement has been implemented.
In addition, taxpayers have to file information about their use of reportable arrangements in each of the years for which the arrangement is used. The reporting obligations start on 1 July 2020, while the first automatic exchange of information among Member States would take place by 31 October 2020.
In addition, there is also a retroactive application of these new rules. Specifically, arrangements for which the first step was implemented between 25 June 2018 and 1 July 2020 are also reportable. This information has to be filed by 31 August 2020.
What needs to be disclosed and exchanged?
Member States would have to exchange information automatically each quarter, via a central database set up and hosted by the European Commission.
Member States should exchange information including, but not limited to: intermediaries’ and taxpayers’ identification elements, details of the hallmarks, a summary of the content of the reportable arrangement including the transaction value, the date on which the first step in the implementation of a reportable arrangement was or will be taken.
Penalties
Each Member State would have to lay down its own penalties for failure to comply with these reporting obligations.
Consequences for business
Companies will need to consider the extent to which their in-house activities would be reportable directly. A business would need systems to identify, capture and report transactions, as well as the knowledge of people in both operations and functions to observe the rules in carrying out daily business, as well as larger project planning.
The takeaway
In outline, Romania has until 31 December 2019 to introduce new rules that require relevant taxpayers and intermediaries to disclose certain reportable transactions to the tax authorities within a 30-day period. Member States would then have to exchange such information automatically on a quarterly basis. Reportable arrangements starting between 25 June 2018 and 1 July 2020 will also have to be disclosed to the tax authorities.
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