Tax transparency has been a hot topic on the agenda of governments worldwide following the introduction of anti-avoidance and transparency measures within the European Union.
The first step was the introduction of Common Reporting Standards (CRS) which changed the world-wide landscape allowing for exchange of information with taxpayers and tax advisers required to devote time and resources to provide information to tax authorities.
The EU Economic and Financial Affairs Council (ECOFIN) reached an agreement in March 2018 on the final draft of the Council Directive (EU 2018/822 which amends Directive 2011/16/EU on mandatory automatic exchange of information regarding reportable cross-boarder arrangements.
According to the Directive of Administrative Cooperation (DAC) cross boarder arrangements will be reportable if they fall within one of a number of “hallmarks” and must be reported as of July 2020. It is important to highlight that the Directive provides that notifications should be made in respect of arrangements dating back to 25th June 2018.
These hallmarks are broad categories which underline characteristics of potentially aggressive tax planning. These are:
1) Commercial characteristics seen in marketed tax avoidance schemes
2) Structured arrangements seen in avoidance planning
3) Cross border transactions
4) Arrangements which challenge tax reporting and transparency
5) Transfer pricing arrangements which are not at arm’s length
Hallmarks 1-3 above will apply only in the case when the “main benefit” test threshold is met. The threshold will be met if obtaining the tax advantage constitutes the main benefit or one of the main benefits derived from the arrangement.
The reporting obligation falls on intermediaries and in some cases on the taxpayer itself with all information being provided to the competent authority of each member state. An intermediary is anyone, who has some connection with the EU, and has designed, marketed, organized or implemented the arrangement. This could be consultants, tax advisors, accountants, lawyers and banks.
It is clear that a number of challenges arise under the new reporting obligations. The main challenge for both tax payers and tax advisers arises from the uncertainty from a regulatory perspective, as the Directive has not yet been implemented in any EU member state and hence local idiosyncrasies are still unknown. This is coupled by the fact that the tax profession is not regulated in Cyprus hence it is will extremely difficult authorities to monitor compliance.
Moreover, it is evident that the hallmarks are considered to be very wide with the detail left to each EU member state to implement into law and provide guidance. This would mean that DAC 6 may be applied in an inconsistent manner across the EU.
An another key challenge arises from the way in which the Directive was drafted relates to the fact that standard transactions with no specific tax motive will be reportable as there is no safe harbor for arrangements which have an underlying commercial purpose.
There is an increased risk that the volume of reportable arrangements will be to such an extent which in some ways might defeat the purpose of identifying the comparably small number of truly aggressive arrangements.
Concluding, the new reporting requirements introduced under DAC 6 will add an additional reporting burden to tax advisors and tax payers and an additional risk of penalties in an ever-changing international tax scene.
Author: Mr. Savvas M. Klitou - Manager, Tax Advisory Services & Regional Coordinator
Baker Tilly Klitou and Partners Ltd