If you think adjusting to and complying with the Common Reporting Standard (CRS) and the U.S. Foreign Account Tax Compliance Act (FATCA) rules was a challenge, and you do business in the European Union, brace yourself for a new set of reporting rules that become effective in the respective EU Member States July 1, 2020, with retroactive effect to June 25, 2018.
The new mandatory reporting requirement is included in the recently amended EU Directive on Administrative Cooperation in the field of Taxation (also referenced as “DAC 6” as it is the sixth major amendment to the Directive on Administrative Cooperation), and regards potentially aggressive tax planning structures that you are about to (help) put in place or may have already (helped) put in place on or after June 25, 2018.
What Is the Governing Law?
EU Directive 2011/16/EU (known as the EU Directive on Administrative Cooperation in Direct Taxation), as amended by Council Directive 2018/822/EU. In the Netherlands, the Directive is to be implemented in domestic law (after a domestic consultation process that took place from Dec. 19, 2018, to Feb. 1, 2019), by proposed legislation published by the Dutch Ministry of Finance on July 11, 2019, and effective as of July 1, 2020, (Kamerstukken II 2018/19, 35255, 2). In the UK, a consultation process is ongoing from July 22, 2019, until Oct. 11, 2019, regarding the upcoming International Tax Enforcement (Disclosable Arrangements) Regulations 2019, to come into force also on July 1, 2020.
What Is the Effective Date?
The actual filing of a report to the tax authorities in a designated format is supposed to commence as from July 1, 2020, but qualifying transactions put in place on or after June 25, 2018, are to be included in the reporting. The exchange of information obtained through the reports to all EU Member States is scheduled to commence on Oct. 31, 2020. These dates in principle apply to all EU Member States (although reportedly Poland’s reporting rules became effective Jan. 1, 2019, and required de facto reporting by June 30, 2019, for certain cross-border arrangements).
Who Is Obliged to Report?
The primary obligation to report is on so-called “intermediaries” defined as those persons who are involved in designing, offering, marketing, and organizing or managing the implementation of a so-called reportable cross-border transaction; as well as those who provide assistance with implementation or advice with respect thereto. If a qualifying intermediary does not (have to) report (for example because of an applicable privilege or right to a waiver), another intermediary or the taxpayer will be obliged to report. If and to the extent an individual designs, offers, markets and organizes or manages the implementation of a reportable cross-border transaction and operates as representative of a professional services Firm, the Firm will be considered the intermediary.
To be an intermediary, you must be either (i) a tax resident in an EU Member State; (ii) have a permanent establishment in a Member State through which services are rendered; (iii) be incorporated in a Member State; or (iv) be registered with a professional association related to legal, taxation or consultancy services in a Member State. The order of who is designated as a qualifying intermediary in the previous listing is also relevant for determining what intermediary has the primary responsibility to report in case there are more intermediaries involved.
The Dutch legislative guidance clarifies, for the purposes of determining when a Dutch entity has obligations as an intermediary, that if an intermediary who is a fiscal resident of the Netherlands renders services through a foreign permanent establishment with respect to a reportable cross-border transaction, but the “parent” of the foreign permanent establishment as such is not at all involved, that particular intermediary does not have a Dutch reporting obligation (whether or not a report is required to be made in the jurisdiction of the foreign permanent establishment). It may need to be determined if that intermediary has a reporting obligation in another EU Member State, however.
The U.K. consultation document does not contain equivalent guidance and therefore it must currently be assumed that if a U.K. resident company provides services through a foreign permanent establishment with respect to a reportable transaction that the U.K. “parent” is not involved in, a U.K. reporting obligation is triggered at U.K. entity level. Noting the wording in the Directive relating to an intermediary reporting only in one jurisdiction based on a hierarchy of tests, and (where the Netherlands is relevant) the subsequent Dutch interpretation and legislative guidance, there is good reason to very carefully review whether an intermediary has a reporting requirement or not in a respective country and consider whether that reporting requirement alternatively may be in another EU Member State. For example, Poland’s rules reportedly even cover intermediaries beyond those that are resident in or based in EU Member States.
Who Is Exempt From Reporting or Has a Less Strict Reporting Requirement?
- Anyone who is not a qualifying intermediary;
- Anyone who is a qualifying intermediary but who has proof (ideally a reference number of a previously made report) that the requested reportable information has already been filed timely in an(other) EU Member State;
- Anyone who is a qualifying intermediary and who under domestic law is entitled to a waiver from filing the required information on the reportable transaction because the reportable information would breach the legal professional privilege under the national law of that Member State. In that case the reporting obligation shifts to another intermediary or to the relevant taxpayer. The intermediary qualifying for a waiver/privilege may have a duty to inform other intermediaries;
- Dutch legislative guidance clarifies that intermediaries that provide assistance with implementation of a reportable transaction or advice with respect to a reportable transaction (referenced as so-called “assisting intermediaries”) but that do not design, offer, market and organize, or manage the implementation of a reportable cross-border transaction have the right to provide evidence that they were unaware of being involved with a reportable transaction. If they succeed in providing that evidence, they will not be considered “intermediaries” and will thus also not be subject to the applicable (Dutch) penalties for non-compliance. In this respect, the expertise and knowledge required to render the respective (level of) assistance is relevant and an assisting intermediary does not have to investigate whether he/she qualifies as assisting intermediary or as a “main” intermediary. Reasonable knowledge or understanding of whether the intermediary acts as an assisting intermediary, or as a “main” intermediary would be sufficient.
- Similarly, the U.K. consultation paper references intermediaries that provide aid, assistance, or advice in relation to the designing, offering, marketing and organizing, or implementation of a reportable cross-border transaction as “service providers.” Like the Dutch legislative guidance, service providers can argue that they did not know and could not reasonably have been expected to know that they were involved in a reportable arrangement, and in that case the reportable obligation does not arise in respect to that person. Service providers do not have to do any additional due diligence to establish if there is a reportable arrangement. They just must conduct their normal due diligence.
- If a qualifying intermediary is required to report to several EU Member States, the reporting system provides that reporting is only required in one EU Member State, namely in the EU Member State that is listed first on a list consisting of:
- the EU Member State where the intermediary is tax resident;
- the EU Member State where the intermediary has a permanent establishment through which the services related to the reportable cross-border transaction are rendered;
- the EU Member State where the intermediary is incorporated or falls under the applicable legislation; and
- the EU Member State where the intermediary is registered with a professional organization related to the rendering of legal, tax or advice services.
Consequently, the qualifying intermediary is exempt from having to report in EU Member States lower on the list if it can reference that the information has been provided and reported in an EU Member State that is higher on the above list.
- If a qualifying intermediary invokes a (legal) confidentiality privilege, that intermediary is (generally) exempt from reporting, within the scope of that confidentiality privilege. That said, the intermediary then must inform other intermediaries involved with the same reportable cross-border transaction or, if not available, the taxpayer, of their obligation to report the reportable cross-border transaction in their respective EU Member State. The Dutch technical explanation to the draft legislation indicates that the qualifying intermediary who is invoking the legal privilege does not have a duty to investigate whether there are other qualifying intermediaries involved, if he or she is unaware of such involvement. The U.K. draft legislation does not have a similar clause.
- If and to the extent the burden of reporting the cross-border arrangement shifts from the intermediary/intermediaries to the relevant taxpayer, the reporting system provides that reporting is only required in the EU Member State that is listed first on the following list:
- the EU Member State where the taxpayer is tax resident;
- the EU Member State where the taxpayer has a permanent establishment which is the beneficiary of the reportable cross-border transaction;
- the EU Member State where the taxpayer receives income or generates profit, even though the taxpayer is not a fiscal resident of an EU Member State and has no permanent establishment in an EU Member State;
- the EU Member State where the taxpayer conducts activities, even if the taxpayer is no fiscal resident of an EU Member State and has no permanent establishment in an EU Member State.
Consequently, the relevant taxpayer is exempt from having to report in EU Member States lower on the above list if it can reference that the information has been reported in an EU Member State that is higher on the above list.
- If and to the extent there are several relevant taxpayers that qualify to report the same reportable cross-border transaction, the reporting system provides that reporting is only required by one relevant taxpayer, namely the relevant taxpayer who is listed first on the following list:
- the relevant taxpayer that has agreed to the reportable cross-border transaction with the intermediary;
- the relevant taxpayer that manages and controls the implementation of the reportable cross-border transaction.
Consequently, the relevant taxpayer lower on the above list is exempt from the reporting obligation if it can reference that the information has been provided and reported in an EU Member State by the relevant taxpayer that is higher on the above list.
What Information Must Be Reported?
The Directive targets “reportable cross-border arrangements.” These are cross-border transactions that involve at least one EU Member State and are determined based on meeting at least one of the “hallmarks” that are listed in Annex IV to the Directive.
If a cross-border transaction qualifies as a reportable transaction, the information that needs to be reported includes the following:
- Identification of the respective intermediaries and relevant taxpayers, including their name, date and place of birth (in case of an individual), residence for tax purposes, TIN and, where appropriate, the persons that are associated enterprises to the relevant taxpayer;
- Details of (all) the hallmarks set out in Annex IV of the Directive that (apply and) make the cross-border arrangement reportable;
- A summary of the content of the reportable cross-border arrangement, including a reference to the name by which it is commonly known, if any, and a description in abstract terms of the relevant business activities or arrangements, without leading to the disclosure of a commercial, industrial, or professional secret; of a commercial process; or of information the disclosure of which would be contrary to public policy;
- The date on which the first step in implementing the reportable cross-border transaction has been made or will be made;
- Details of the national (tax) provisions that form the basis of the reportable cross-border arrangement;
- The value of the reportable cross-border arrangement;
- The identification of the Member State of the relevant taxpayer(s) and any other Member State which are likely to be concerned by the reportable cross-border arrangement; and
- The identification of any other person in an EU Member State likely to be affected by the reportable cross-border arrangement, indicating to which EU Member State such person is linked.
When Must Reporting Be Done?
Reporting by intermediaries must be done within a 30-day term that starts running:
- On the day after the reportable cross-border arrangement is made available for implementation;
- On the day after the reportable cross-border arrangement is ready for implementation; or
- When the first step in the implementation of the reportable cross-border arrangement has been made,
whichever occurs first.
As regards the reporting deadlines and processes, a distinction can be made with respect to reportable transactions that are “marketable” and those that are “bespoke.” In the first category, the reporting obligation is phased: the relevant information needs to be reported within 30 days after the day that marketable arrangement is made available for implementation, but in addition, every next three months a periodic update is required. This assumes that the marketable arrangement will need to be personalized and updated with taxpayer information after it has been made available, as it is likely to be made available to other taxpayers as well. In the case of bespoke reportable transactions, the reporting is due within 30 days of the day that transaction is ready for implementation.
The U.K. consultation adds that reporting is required for each year/accounting period that the taxpayer participates in the reportable arrangement, and that the reference number of the initial report must be provided on the corporate tax returns of the relevant taxpayer. Furthermore, it proposes that any year there is a tax effect due to the reportable transaction ought to be considered as a year in which the taxpayer participates in the arrangement.
To Whom Is Reporting Done?
It is envisaged that reporting is done to the national tax authorities of the relevant EU Member States, through a digital reporting system and that each reportable cross-border arrangement, even if it affects different EU Member States, will have a single identifiable reference number.
What Arrangements Are Reportable?
The arrangements regard transactions that meet certain hallmarks. It should be noted that the reportable cross-border transactions listed in the Directive—based on Article 2 of the Directive—relate to all taxes, other than value added tax and customs duties, or excise duties, and indeed appear to extend beyond taxes levied in the EU. The Directive also does not apply to compulsory social security contributions payable to EU Member States. Care is required in considering the scope of the Directive under domestic law of the EU Member States, however. For example: Poland reportedly does include VAT under the covered taxes. The Annex to the Directive lists the relevant hallmarks. There are two groups of hallmarks, some with the explicit requirement that the arrangement meets a “main benefit test” and some that do not have to meet the main benefit test.
Group 1 of the hallmarks includes both generic hallmarks and specific hallmarks, linked to a main benefit test. These transactions need to be reported (only) if the main benefit (reasonably to be expected) or one of the main benefits (reasonably to be expected) of the arrangement is obtaining a tax advantage. The main benefit test is an objective one, but arguably has a lower threshold than a “main purpose” test does. What matters is whether obtaining a tax advantage is the main benefit or one of the main benefits the party entering into the arrangement reasonably expects to obtain from the arrangement. This main benefit can be distilled from comparing the tax costs of the taxpayer without and with implementation of the reportable cross-border transaction.
Group 1/Category A (generic hallmarks)
1. An arrangement where the taxpayer or participant in the arrangement is required to keep secret how the arrangement secures a tax advantage vis-à-vis other intermediaries or the tax authorities and that meets the main benefit test.
2. An arrangement where the intermediary’s fee is contingent on the tax benefit derived and that meets the main benefit test.
3. An arrangement with standardized documentation and a standardized structure that does not need to be substantially customized and that meets the main benefit test.
Group 1/Category B (specific hallmarks)
4. An arrangement where steps are taken to acquire a loss-making company, subsequently discontinuing that company’s business and using or transferring its losses to reduce tax liability (of that or another company) and that meets the main benefit test.
5. An arrangement that converts income into capital, gifts, or other categories of revenue taxed at a lower level than income (or is not taxed at all) and that meets the main benefit test.
6. An arrangement that includes circular (round-trip) transactions through interposed entities without other primary commercial functions or transactions that offset or cancel each other out and that meet the main benefit test.
Group 1/Category C (specific hallmarks related to cross-border transactions)
7. An arrangement that involves deductible cross-border payments between associated enterprises and the recipient of the payments is resident in a jurisdiction that imposes (i) no corporate tax, or (ii) a zero-rate tax or almost zero-rate, and that meets the main benefit test.
8. An arrangement that involves deductible cross-border payments between associated enterprises and the payment benefits from a full exemption from tax in the jurisdiction where the recipient is resident for tax purposes and that meets the main benefit test.
9. An arrangement that involves deductible cross-border payments between associated enterprises and the payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes and that meets the main benefit test.
Group 2 consists of hallmarks without a main benefit test.
Group 2/Category C (specific hallmarks related to cross-border transactions)
10. An arrangement that involves deductible cross-border payments between associated enterprises and the recipient of the payments is not resident in any tax jurisdiction.
11. An arrangement that involves deductible cross-border payments between associated enterprises and the recipient of the payments is listed by the collective EU Member States as a third country jurisdiction having a harmful (non-cooperative) tax regime.
12. An arrangement where the same asset is subject to depreciation in more than one jurisdiction.
13. An arrangement where more than one taxpayer can claim relief from double taxation in respect of the same item of income in more than one jurisdiction.
14. An arrangement (or series of arrangements) that includes transfers of assets and where there is a material difference in the amount treated as payable in consideration for the assets in those jurisdictions.
Group 2/Category D (specific hallmarks concerning automatic exchange of information and beneficial ownership)
15. An arrangement (or series of arrangements) that circumvent EU legislation or that circumvents agreements on the automatic exchange of information (also with non-EU countries) (The Directive provides six different examples).
16. An arrangement that involves a non-transparent legal or beneficial ownership chain: that does not carry on a substantive economic activity supported by adequate staff, equipment, assets, and premises; and that are incorporated, managed, resident, controlled, or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets; and where the beneficial owners are made unidentifiable.
Group 2/Category E (hallmarks concerning transfer pricing)
17. An arrangement that involves unilateral safe harbor rules for transfer pricing.
18. Arrangements that involve the transfer of hard-to-value intangibles.
19. An arrangement that involves an intra-group cross-border transfer of functions and/or risks and/or assets if projected EBIT during three years after the transfer are less than 50% of the projected annual EBIT without such a transfer.
What Happens With the Reported Information?
The standardized forms with information reported will be collected by national tax authorities and will be exchanged through the Common Communication Network (CCN) developed by the European Union to EU Member States on a quarterly basis. The CCN is a secure network developed and operated by the Directorate General of the European Commission responsible for Taxation and Customs (DG TAXUD) to support common policies in the area of customs, excise, and taxation. It offers all national tax administrations a coherent, robust, and secure method of access to all DG TAXUD applications.
Furthermore, a central filing location will be designated in each EU Member State for cross-border reportable transactions. This may include hardcopy filings or (more likely) electronic filings that remain available for automatic exchange of information between the tax authorities of all the EU Member States.
Three years after the date of entry into force of the Directive (which was June 25, 2018) and every three years thereafter, the Commission is required to submit a report on the application of the Directive to the European Parliament and to the Council.
Will Reported Transactions Be Audited?
Reportable cross-border transactions do not by definition qualify as tax avoidance or tax evasion. The reporting of the transactions serves first and foremost for risk assessment purposes and next to dissuade intermediaries to advise on or offer such transactions. That said, it should be expected that reported transactions will be scrutinized and audited by the tax authorities, to determine if they do rise to the level of undesired tax avoidance or tax evasion.
What Happens If You Don’t Report?
The Directive instructs EU Member States to apply penalties for non-compliance, but EU Member States have discretion to decide on the applicable penalty regime. Pursuant to the Dutch draft legislation to implement the Directive, the penalty for wilful failure to not file a reportable transaction can be as high as 830,000 euros but the determination of a penalty is subject to a proportionality principle. In the U.K., the penalty provisions reference the U.K. DOTAS regime and amount to 600 pounds for each day during an initial period for certain scenarios, 5,000 pounds in other cases and if the failure continues after a penalty is imposed, another 600 pounds for each day on which the failure continues or up to 10,000 pounds in other scenarios.
According to Parliamentary history to the Directive, the EU Parliament requested the Member States to make publicly available a list of intermediaries and taxpayers on whom penalties have been imposed under the Directive including names, nationalities and residences. At this time, it is not clear whether that instruction will be implemented, however.
What About Confidentiality of Information?
Only EU Member States and the EU Commission have access to the data stored on the CCN, but it will be subject to automatic exchange to all the EU Member States.
What Do You Need to Do Now?
As the Directive applies to reportable cross-border transactions that have been put in place or for which the first step of implementation was made on or after June 25, 2018, first and foremost, you will need to consider and assess whether any reportable cross-border transactions exist (marketable or bespoke) with respect to which you were a taxpayer or a qualifying intermediary since that time. To survey this, a series of to-the-point questions should be asked, and once it is determined that such reportable cross-border transactions indeed exist, it will need to be determined who will have an obligation to report the required information. The reporting deadline for these transactions is Aug. 31, 2020.
The Netherlands has indicated that they will issue further guidance and will also institute a separate Mandatory Disclosure Rule (MDR) desk where taxpayers and intermediaries can seek assistance, and which will have primary responsibility for communication with other EU Member States. We recommend closely following domestic legislative guidance on this topic in the EU Member States where you engage in transactions or do business and consider if there are cross-border transactions and related advice that may fall within the scope of the Directive.
It should be noted that if the U.K. were to leave the EU in a hard Brexit on October 31, 2019, the proposed legislation is very likely to continue to be in effect, requiring reporting of qualifying cross-border arrangements in the U.K. In that case, if the collected information would not be subject to the automatic exchange of information process under the Directive, it alternatively can be made available based on the authority of bilateral tax treaties the U.K. has in place.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Monique van Herksen and Hatice Ismail, both tax lawyers and partners with Simmons & Simmons, respectively based in the Amsterdam and London offices of the firm, discuss the relevant rules and Dutch and British draft legislation. They can be reached at firstname.lastname@example.org and email@example.com.