The revolution in the fight against aggressive tax planning
Contributed by Larssen
26 July, 2019
The new directive imposes an obligation to inform the tax manager of even the potential cross-border deals.
Leonid Ageev, partner, Larssen Capital LLC,
Council Directive (EU) 2018/822 of 25 May 2018, which entered into force on 25 June 2018, on amendments and additions to the Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements, is of truly revolutionary significance.
Namely: it imposes an obligation to inform the tax manager of potential cross-border schemes (deals) aimed at reducing taxation.
Tax planning schemes under control
We are speaking of the sixth edition of the Directive on administrative cooperation between tax managers of the European Union states (hereinafter - the EU) in the field of taxation (i.e. the Directive on administrative cooperation in the field of taxation), therefore, it is also called DAC6 (hereinafter also referred to as the Directive).
The Directive is aimed at combating aggressive tax planning schemes by informing local tax managers about them and then automatically exchanging information about such schemes within the EU.
DAC6 applies to direct taxes (income tax) and does not apply to value added tax, customs duties, excise taxes, and social tax.
In the UK, Portugal, Canada, RSA, Australia, USA, Ireland, Israel, and South Korea, similar rules were established before the adoption of the Directive and are valid for several years already.
The Directive should be implemented on a mandatory basis in the legislation of the EU states, before the end of 2019, and applied from 1 July 2020.
For taxpayers, the Directive is already relevant from the date of its entry into force (25 June 2018), since it applies to cross-border schemes (deals), which were initiated between 25 June 2018 and 1 July 2020.
According to the Directive, the scheme may be legal, it may not be implemented at all, but, nevertheless, it must be "reported", indicating the personal data of the taxpayers - the persons for which the cross-border scheme is created. Moreover, this task in some cases falls on the taxpayer, and not only on consultants.
Failure to comply with these requirements will be subject to penalties. Reading the directive causes an involuntary association with George Orwell's "thoughtcrimes".
Directive as the next link in the BEPS chain
The Organization for Economic Co-operation and Development has designed and adopted a plan of activities and measures aimed at countering tax evasion ( Base Erosion and Profit Shifting, hereinafter - the BEPS). In October 2015, the final report was published, containing 15 practical measures for the implementation of this plan.
The adoption of DAC6 is the next step in the implementation of the BEPS plan, or rather, its twelfth measure, aimed at disclosing tax optimization schemes.
According to the report of the Organization for Economic Co-operation and Development, the lack of timely, comprehensive information on strategies for cross-border aggressive tax planning does not allow tax authorities to resist, timely and effectively, the use of schemes that allow them to evade taxation. And vice versa - the information received in time will allow the use of preventive measures that impede their implementation.
Tax advisors, and well as the taxpayers are well informed about the differences in tax systems of different countries, their gaps and advantages, the use of which allows to create schemes for reducing or avoiding taxation.
The purpose of DAC6 is precisely the creation of such a system in which prior notification of such planned cross-border schemes (deals) will become mandatory. EU member states will regularly exchange the information received.
Contents of DAC6
In accordance with the Directive, intermediaries based in the EU will be required to provide information to the local tax manager about accountable cross-border schemes that bear one or more signs of aggressive tax planning and concern at least one EU state.
The intermediary, within the meaning of the Directive, is any person who develops an accountable cross-border scheme, distributes it, organizes it, makes it possible to apply, controls its application.
Obviously, such intermediaries are all tax advisors, lawyers and other specialists who advise clients on tax matters.
However, since the Directive does not clearly define what the role of the intermediary should be in relation to the scheme, this concept can also cover all persons servicing such schemes â in particular, banks, payment companies, accountants and suchlike, even if they were not developers of the scheme, in case if at least one of the certain conditions is met.
A person is considered to be an intermediary within the meaning of the Directive if this person:
- is a tax resident of one of the EU states
- has a permanent place of business in an EU state, through which services are provided in relation to the "scheme"
- is established in accordance with the laws of the EU member state
- is registered in the legal, tax or consulting professional association of one of the EU states.
Meanwhile, the obligation of informing falls not on intermediaries only. The Directive states that when professional obligations for maintaining confidentiality are applied to the intermediaries, or the intermediary is absent, or operates outside the EU, the obligation to inform falls on the taxpayer himself.
In this context, a taxpayer is any person for whom the scheme is prepared for implementation, or who is willing to apply the scheme, or who has taken the first step to implement it.
Failure to comply with the informing requirement is fraught with fine. EU states have the right to determine the size of such fine, which, in accordance with the Directive, must be effective, proportionate and disincentive. For example, in Poland, where the Directive is already implemented, the amount of the fine can reach 2 million zlotys (465,000 euros), and, in some cases, even 10,000,000 zlotys.
A cross-border scheme is a scheme (including a deal, operation, and so on) related to two or more EU state, or an EU state and a third state.
A scheme becomes accountable in case if it contains one of the features given in the annex to the Directive.
Signs of an aggressive tax planning scheme
The introduction to the Directive says that it is aimed at disclosing "aggressive tax planning" schemes, but this concept itself has not been clarified. Instead, a number of "features" is presented, representing a set of typical properties inherent to tax planning schemes, which, according to the Directive, indicate potential taxation evasion.
Features are divided into two groups:
1. General and specific features that are taken into account only when they meet the so-called criteria of the main goal:
- When creating a scheme, the clause on non-disclosure of tax benefits obtained is applied, the payment for the services of an intermediary depends on the size of the tax advantage received, standardized documentation and structures are used.
- Unprofitable companies are used, income qualifies in such a category that allows reducing, or avoiding taxation, carousel deals are applied.
In accordance with the Directive, the latter criterion is considered met if "taking into account all the facts and circumstances, a person can reasonably expect to get the tax advantage as the main benefit or one of the main benefits when using the scheme".
2. Features taken into account regardless of their compliance with the "criterion of the main goal".
They mainly concern cross-border deals, or deals aimed at circumventing the automatic exchange of information in the EU. In particular:
- Deals with affiliated companies that are not tax residents in any of the jurisdictions, the payment is exempt from taxation (or subject to preferential taxation) in the country of the income recipient; uses the possibility of avoiding double taxation and adjustment for depreciation in more than one jurisdiction.
- Schemes, as a result of which the EU regulations concerning the automatic exchange of information on financial accounts are leveled, schemes using natural, legal entities or structures with non-transparent legal or beneficial ownership.
- Schemes related to transfer pricing and including: one-sided use of "safe harbor" rules; the transfer of an intangible asset whose value is difficult to estimate; intra-group cross-border transfer of functions/risks or assets in some cases.
Utopia or effective measure?
To sum up, we can say that the new Directive imposes on intermediaries, and in some cases, on taxpayers, some duties that can be quite burdensome and difficult to implement.
The main difficulty is to determine the scheme for compliance with the "criterion of the main goal". It lies in the fact that the concept of "tax advantage" is not defined by the Directive, and the principle of "one of the main benefits" compared with the principle of "main benefit" is ambiguous.
As a result, in total, this can lead to the fact that any tax planning, structuring or deal that is different from "tax idiocy" can meet the "criterion of the main goal", and therefore will be considered an "accountable scheme" of which one should notify the tax manager to avoid the risk of being fined. But take into consideration: if the tax manager in no way responds to this notice, this will in no way mean that he approved the scheme as legal. So, it is quite appropriate to draw a line using the citation from the great anti-utopia of the 20th century: "If you want to keep a secret, you must also hide it from yourself".
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