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EU Launches New Initiative Targeting Tax Advisers (Part 1)

Oct. 10, 2022, 7:00 AM

On July 6, 2022, the European Commission launched a public consultation regarding a proposal for council directive to tackle tax advisers and other professionals rendering tax advice (collectively referred to as “enablers”) that facilitate tax evasion and aggressive tax planning.

Interested parties may provide their feedback until Oct. 12, 2022, in a questionnaire, the EU survey: “Proposal for a Council Directive to tackle the role of enablers that facilitate tax evasion and aggressive tax planning in the European Union (Securing the Activity Framework of Enablers—SAFE).”

This two-part article discusses the current EU anti-abuse measures in place, provides an overview of the questionnaire, and analyses to what extent there is a real need for this initiative.

The Current EU Tax Landscape

The European and international tax landscape has undergone a dramatic transformation over the last years. Following the Organisation for Economic Cooperation and Development base erosion and profit shifting (BEPS) project, the European Commission adopted several EU directives that aimed to tackle perceived tax evasion and tax avoidance.

The two Anti-Tax Avoidance Directives (ATAD and ATAD II) provided for a number of strict anti-abuse provisions that had to be transposed into the domestic tax laws of EU member states. The fifth amendment of the Directive on Administrative Cooperation in the field of (direct) taxation (DAC6) resulted in the introduction of the mandatory disclosure regime that requires reporting on potentially aggressive tax planning schemes.

At the end of 2021, the European Commission further released a draft directive regarding the misuse of EU shell entities—entities lacking a minimum level of substance for tax purposes—ATAD III, also referred to as the “unshell directive”.

Other important changes to the international tax landscape have been advanced by the OECD. The multilateral instrument resulted in the implementation of various anti-abuse provisions such as the principal purpose test (PPT) in covered bilateral tax treaties. In 2017 and 2020, the OECD Transfer Pricing Guidelines were revised in accordance with the guidance developed as part of the OECD’s (follow up) work on BEPS Actions 8–10 and 13.

Hence, the tax authorities of EU member states already have a comprehensive arsenal of anti-abuse rules that allow them to tackle any kind of abusive situation, as well as reporting requirements that should allow them to be aware of any residual abuse.

A New EU Initiative

Nevertheless, despite all these changes, the European Commission takes the view that tax advisers are still designing, marketing, and assisting in the creation of tax schemes in non-EU countries that erode the tax base of EU member states. The Commission states in its document Call for evidence for an impact assessment that while the unshell directive will ensure that EU shell entities are unable to benefit from any tax advantages, a follow-up initiative is still needed to respond to the challenges linked to non-EU shell entities.

The purpose of the current initiative is to establish procedures and compliance measures to be adhered to by tax advisers and other professionals that render tax advisory services, in order to prevent them from setting up complex structures in non-EU countries that erode the tax base of member states through tax evasion and aggressive tax planning.

Tax Evasion and Aggressive Tax Planning

The Commission’s questionnaire states: “Complex structures, which typically include cross-border arrangements that could result in tax evasion or aggressive tax planning may be designed by some intermediaries that provide tax advisory services.” However, is this really true?

Tax evasion involves intentional, fraudulent conduct aimed at the evasion of taxes by illegal means. In these cases, taxpayers deliberately misrepresent or conceal the true state of their affairs from the tax authorities in order to reduce their tax liability.

Examples of tax evasion include dishonest tax reporting—for instance, the non-declaration or under-reporting of income or the overstating of expenses, faked transactions to reduce tax payments, and transfer pricing manipulations. Tax evasion involves a violation of law, is a criminal offense and may, therefore, be tackled by enforcement of the existing law (once discovered by the competent tax authorities).

While taxpayers engaging in tax evasion face severe penalties, and potential imprisonment, tax advisers involved in tax evasion will likely be punished by the withdrawal of their professional license and charged with a crime. These severe consequences deter (exceptions aside) taxpayers and tax advisers from being involved in practices that may be interpreted as tax evasion.

The term “aggressive tax planning” has been defined in the Commission Recommendation of Dec. 6, 2012 on Aggressive Tax Planning (2012/772/EU) as follows:

“Aggressive tax planning consists in taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability. Aggressive tax planning can take a multitude of forms. Its consequences include double deductions (e.g. the same loss is deducted both in the State of source and residence) and double non-taxation (e.g. income which is not taxed in the source State is exempt in the State of residence).”

Accordingly, aggressive tax planning is present in the following two situations:

  • Taxpayers take advantage of the technicalities of a tax system; or
  • Taxpayers take advantage of mismatches between two or more tax systems.

Both situations have in common that the tax treatment would not be consistent with the intention of the legislator.

However, the tax treatment of an arrangement is consistent with the intention of the legislator when the tax treatment relies on the application of explicit tax law (which is the expression of the intention of the legislator) or, in a cross-border context, does not take advantage of mismatches in the tax system of two or more jurisdictions.

The transposition of ATAD I and ATAD II resulted in the adoption of the following anti-abuse legislation by EU member states:

a) interest limitation rules
b) controlled foreign company (CFC) rules
c) exit tax rules
d) general anti-abuse Rule (GAAR), and
e) hybrid mismatch rules.

The specific anti-abuse rules in a)–c) target perceived vulnerabilities of domestic tax laws and resulted in a substantial harmonization of the tax laws of EU member states.

As regards aggressive tax planning, the GAAR allows tax authorities to tackle non-genuine arrangements which take advantage of technicalities of the applicable tax law, whereas the hybrid mismatch rules eliminate mismatch outcomes (double deduction and deduction without inclusion outcomes) that are the result of mismatches in the tax systems of two or more jurisdictions.

Tax benefits available under applicable tax treaties may be challenged in accordance with anti-abuse provisions such as the PPT, eliminating the possibility of taxpayers engaging in aggressive tax planning.

The revised OECD Transfer Pricing Guidelines include new guidance that aims to align transfer pricing outcomes with value creation. Moreover, the amended guidance provides tax authorities with additional room to challenge the transfer pricing of intra-group transactions and to disregard or re-characterize certain intra-group transactions.

Consequently, the transposition of the anti-tax avoidance directives, the modification of the bilateral tax treaty network, and the revision of the OECD Transfer Pricing Guidelines, virtually removed the possibility of using aggressive tax planning strategies and provided the tax administrations with far-reaching powers to challenge taxpayers.

Part two of this article will consider the content of the EU questionnaire and the issue of whether there is a need for further initiatives in the current tax landscape.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Oliver R. Hoor is a Tax Partner (Head of Transfer Pricing and the German Desk) with ATOZ Tax Advisers.

The author may be contacted at: oliver.hoor@atoz.lu

The author wishes to thank Samantha Schmitz for her assistance in relation to the review of this article.