[Updated on 13/03/2018 at 12:10]
Why do we need new transparency requirements for intermediaries?
The new rules agreed today form part of the Juncker Commission's ambitious agenda to tackle tax abuse and ensure fairer taxation in the EU. Unprecedented strides have already been taken by the EU to boost tax transparency and close loopholes leading to large scale tax avoidance. Thanks to binding measures and greater transparency, it is now much harder for large companies to get away with not paying their fair share of tax. The Commission has also put in place a strategy to deal with non-EU countries that refuse to play fair when it comes to tax and a common EU blacklist of tax havens was published recently.
The binding measures mean that the EU is now also tackling the central role played by intermediaries in international tax avoidance and evasion, as exposed in the Panama and Paradise Papers for instance. Most services provided by intermediaries, such as tax advisers, accountants, financial institutions, law firms, are legitimate. However, certain intermediaries actively design, promote and sell schemes with the specific aim of helping their clients escape taxation.
The Commission had underlined the urgent need to create more transparency and accountability in this area in July 2016 and confirmed that it would propose EU-wide rules. The Council and European Parliament also called for EU measures against those that enable or promote aggressive tax planning. Some Member States (UK, Ireland and Portugal) already have mandatory reporting requirements for intermediaries and these rules have proven very effective in clamping down on domestic tax abuse. In addition, the OECD BEPS project recommended that countries introduce mandatory disclosure requirements for aggressive tax planning schemes. The measures agreed today will ensure that all Member States have the same oversight of tax planners' activities, and that they cooperate in preventing aggressive tax planning schemes.
What has the Commission been doing to fight tax evasion and avoidance in the EU?
The Commission is pursuing an ambitious agenda to strengthen EU defences against tax evasion and avoidance, which has already resulted in a number of landmark achievements.
This agenda is based on three main pillars:
Major progress has been made in increasing openness and cooperation between Member States on tax issues. Member States have agreed to automatically exchange information on tax rulings (from July 2017) and on multinationals' country-by-country reports (from June 2018). They also agreed on new rules which will give tax authorities access to anti-money laundering information, an idea proposed in the wake of the Panama Papers. The Commission also proposed public country-by-country reporting for multinationals in April 2016, to provide citizens with greater oversight of companies' tax practices. This proposal is currently being negotiated by the Council and Parliament.
Fair and Effective Taxation:
A primary goal in the EU corporate tax agenda is to ensure that all companies pay tax where they make their profits. This called for strong, coordinated measures to block cross-border tax avoidance. In January 2016, the Commission proposed an Anti-Tax Avoidance Directive (ATAD), setting out legally-binding anti-abuse measures for the entire EU. Member States adopted this ambitious new legislation within 6 months, and it will enter into force in 2019. These measures were complemented with measures to tackle tax loopholes ('hybrid mismatches') in relation to third countries (ATAD 2), which Member States adopted in May 2017. A review of preferential regimes (patent boxes) was also launched, to prevent them from being abused for tax avoidance reasons. Lastly, with the CCCTB, the Commission has proposed a far-reaching corporate tax reform which would put in place a fair and effective corporate tax system in the EU.
Global Tax Good Governance:
An External Strategy for Effective Taxation was presented by the Commission in January 2016, to establish a more coherent and effective approach to promoting tax good governance internationally. A key component of this Strategy is a new EU listing process, to deal with non-cooperative tax jurisdictions. The first EU list was published in December 2017, and a number of jurisdictions are now being closely monitored to ensure that they fulfil the commitments they made to improve their tax systems as part of the listing exercise. Dissuasive counter‑measures at national and EU level should now be agreed for the countries that find themselves find themselves on the list. Finally, through a number of state aid cases, the Commission has challenged selective tax advantages granted to multinational companies.
How will the reporting requirements for intermediaries help to reduce tax avoidance?
The immediate effect of the new rules will be to give Member States more information on the tax planning schemes that intermediaries design and market, so that they can then assess whether those schemes facilitate tax evasion and avoidance. The agreed measures will enable the national authorities to react much more quickly to risks of tax abuse. In addition, Member States will be in a position to better target their audits or even change their legislation to close any loopholes that are being abused.
The reporting requirements will also act as a deterrent for those that promote aggressive tax planning schemes. Intermediaries are less likely to design arrangements that risk being blocked. Companies also risk causing serious damage to their reputation if they are found to be marketing or using aggressive tax planning schemes.
Finally, Member States must automatically exchange the information they receive from intermediaries with all other Member States. This is particularly important for cross-border schemes: all Member States should be aware of any tax planning arrangements that may have an impact on their tax base, regardless of where the scheme is designed and marketed.
Which intermediaries are covered by the new rules?
The Directive has the widest possible scope, covering all intermediaries and all types of direct taxes (income, corporate, capital gains, inheritance, etc.). Any company or professional that designs or promotes a tax planning arrangement which has a cross-border element and contains any of the hallmarks set out in the Directive will be covered. This includes lawyers, accountants, tax and financial advisers, banks and consultants.
How would the measures work in practice?
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 Directive (see below). They must make this report to their tax authorities within thirty days of the day that the arrangement is made available, is ready for implementation or after the first step has been implemented – whichever occurs first.
The Member State to whom the arrangements are reported must automatically share this information with all other Member States every three months through a centralised database. There will be a standard format for the exchange of this information, which will include details on the intermediary, the tax payer(s) involved and features of the tax scheme, amongst other information.
The Commission will have access to certain aspects of the information exchanged between Member States, so that it can monitor the implementation of the rules. The new reporting requirements will enter into force on 1 July 2020, with EU Member States obliged to exchange information every 3 months. The first exchange shall take place by 31 October 2020.
Intermediaries or relevant taxpayers, as appropriate, shall file information on reportable cross-border arrangements the first step of which was implemented between its date of entry into force (i.e. 20 days after its publication in the EU's Official Journal) and the date of application of this Directive (1st July 2020). The filing shall be completed by 31st August 2020.
Finally, Member States must ensure that effective and dissuasive penalties are put in place for intermediaries who fail to meet these reporting requirements.
What happens if the intermediary is based in a non-EU country?
EU legislation cannot be extended to cover intermediaries that are not based in the EU. It would be impossible to enforce compliance with the rules or to sanction non-compliance of intermediaries without sufficient presence in the EU. Therefore, if the intermediary is not located in the EU or is bound by professional privilege or secrecy rules (see below), the obligation to report the tax arrangement passes to the taxpayer instead.
What tax planning arrangements will have to be reported?
Intermediaries will have to report any cross-border arrangement that contains one or more of the 'hallmarks' listed in the Directive. These hallmarks are features or characteristics in a tax planning arrangement 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 or almost 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;
- have a direct correlation between the fee charged by the intermediary and what the taxpayer will save in tax avoidance;
- ensure that deductions for the same depreciation on an asset are claimed in more than one jurisdiction;
- claim relief from double taxation for the same income or capital in more than one jurisdiction.
Intermediaries will need to be familiar with the full set of hallmarks in the legislation to ensure that they meet their reporting obligations fully.
How did the Commission choose the hallmarks which trigger the reporting requirement?
The hallmarks reflect features that are commonly found in aggressive tax planning arrangements. They are as wide-ranging as possible to avoid any loopholes or omissions that could be exploited by aggressive tax planners. In selecting the hallmarks, the Commission took inspiration from the OECD mandatory disclosure provisions (BEPS Action 12), Member States' mandatory disclosure legislation and other studies and reports on aggressive tax planning schemes.
What sanctions will apply to intermediaries that do not report the arrangements?
Member States must ensure effective, proportionate and dissuasive penalties for intermediaries that do not respect the reporting requirements. The decision on the exact nature of these penalties is being left as a national competence and each Member State must decide its own national sanctions to apply. These could include, for example, fines or administrative sanctions. Beyond national sanctions, there would also be a reputational risk for intermediaries that fail to comply with the reporting obligations. The proposed reporting requirements will also create a disincentive for designing and marketing aggressive tax planning schemes, as they could be quickly blocked by the authorities.
Will the new reporting and information exchange requirements create new burdens for the industry?
The reporting requirements are designed to avoid creating undue burdens on the industry. For the reports to tax authorities, intermediaries can re-use summaries that they prepare for their clients on the tax planning arrangements. In addition, the measures respect national rules on professional privileges and secrecy as in these cases, the obligation to report no longer falls on the intermediary but shifts to the taxpayer.
Although there is no minimum threshold for disclosure, the hallmarks for reporting usually point to high-risk situations that involve elaborate arrangements. This kind of sophisticated tax advice would not normally be affordable for small companies or individuals. In practice, the reporting obligation would mostly affect larger corporate taxpayers or very wealthy individuals.
Member States who already operate mandatory disclosure rules, such as the UK, have not noted a negative impact on the industry as a result of the transparency requirements.
Will the information exchange requirements create new burdens for national tax authorities?
No. Member States already automatically exchange information on some forms of income (e.g. financial accounts and VAT) through well-developed EU systems. In July 2017, authorities began to exchange information on their tax rulings and, by the end of June this year, they will exchange tax information of multinational companies for the first time. The new requirements for intermediaries will be built into this existing framework. Member States will use all the procedures and processes already in place, making it quicker and easier for them to apply the new rules.
If intermediaries declare all tax planning arrangements in advance, are the other EU transparency and anti-avoidance measures still necessary?
Each new EU measure to boost tax transparency and counteract tax abuse reinforces Member States' ability to prevent, detect and clamp down on aggressive tax planning. Collectively, they create a comprehensive EU system against tax evasion and avoidance, which addresses the main risk areas and ensures safety-nets against harmful schemes and regimes. This initiative builds on this system. It offers Member States a valuable early warning system, so that they can react quickly against abusive tax schemes. But the other EU transparency and anti-abuse measures, agreed over the past few years, are equally important. For example, they will capture arrangements that are not linked to intermediaries, they will ensure that tax rulings are transparent and fair, they will provide better oversight of multinationals' tax practices, and they will remove some of the main loopholes and mismatches exploited by tax evaders and avoiders. The Commission continuously reviews the transparency and anti-avoidance measures at EU level, to ensure that no gaps remain, and is ready to react quickly to any new risks or challenges as they arise.
Is this Directive in line with international action to tackle base erosion and profit shifting (BEPS)?
The OECD BEPS project recommended that all countries introduce a mandatory disclosure requirement for intermediaries (BEPS Action 12). However, it was not prescriptive in how countries should implement such measures, nor did it provide for the exchange of information between countries on the reported schemes.
The Directive is fully compatible with BEPS. It has the added advantage of being legally binding and ensuring that all Member States apply the same measures for intermediaries. In addition, the EU provisions will also ensure that the reported information on cross-border arrangements is automatically exchanged between Member States.
What progress has been made with implementing the OECD BEPS recommendations in the EU?
The OECD Base Erosion and Profit Shifting (BEPS) project, agreed in October 2015, provides for 15 Actions to "equip governments with the domestic and international instruments needed to tackle" the erosion of their tax bases and profit shifting for tax avoidance purposes in their jurisdictions. These recommendations are not legally-binding - the OECD does not have legal authority – but all G20 countries are politically committed to the BEPS project and endorsed its outputs, as have all 28 EU Member States.
While the OECD BEPS project has produced a good framework for international corporate tax reform, the EU needs to tailor these to fit the Single Market so as to allow all EU countries to protect their tax bases. The Commission's approach has been to enshrine key BEPS measures into binding EU law, so that they are swiftly and smoothly implemented across the EU, leaving no room for different interpretations of these standards. The EU has sought to lead by example, using the BEPS standards as the basis on which to create a solid, legal framework for Member States.
What is the scale of tax evasion and avoidance in the EU?
Tax evasion and avoidance are notoriously difficult to quantify, due to their nature and the lack of national data. A recent study by the European Parliament estimated that tax avoidance costs public budgets between €50-70 billion a year, while another study estimated that a total of €173 billion was evaded or avoided through the Panama Paper schemes alone.