BEPS: Initial impressions of discussion draft (Action 12)

BEPS: Initial impressions discussion draft (Action 12)

The Organisation for Economic Co-operation and Development (OECD) released a discussion draft pursuant to Action 12 (Mandatory Disclosure Rules) on 31 March 2015 under the base erosion and profit shifting (BEPS) action plan.

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The following report summarizes and provides initial impressions of the BEPS Action 12 discussion draft [PDF 668 KB].


BEPS Action 12 is intended to address the challenge tax authorities have in obtaining information on potentially aggressive or abusive tax avoidance arrangements (ATAs) by requiring taxpayers and their advisers to disclose information about ATAs.

Having access to comprehensive and relevant information, especially at an early stage, provides countries the opportunity to quickly respond to tax risks through timely changes to regulations, improved legislation, and improved risk assessment and compliance programs.

BEPS Action 12 specifically involves:

  • Recommendations on the design of mandatory disclosure regimes (MDRs)
  • A focus on international tax schemes, and
  • Designing and putting in place enhanced models of information sharing for international tax schemes

The first two items are the focus of the BEPS Action 12 discussion draft (Discussion Draft) that was released, and the third item remains outstanding and will require taking into account other BEPS Action items that involve information sharing.

MDR objectives and design principles

The Discussion Draft focuses on the objectives of adopting an MDR and details recommended key MDR features based existing MDR regimes. The objectives of MDRs are generally:

  • To obtain information about ATAs early
  • To identify ATAs and their users and promoters, and
  • To deter and reduce the promotion and use of ATAs

While the data available on the effectiveness of MDRs is not complete, the Discussion Draft evaluates available evidence and concludes that most MDRs meet these objectives. Thus, the Discussion Draft recommends that countries without MDRs adopt MDRs based on certain key design principles. These principles broadly are that MDRs:

  • Be clear and easy to understand
  • Balance additional compliance costs to taxpayers with the benefits obtained by the tax administration
  • Be effective in achieving the intended policy objectives and accurately identify relevant ATAs
  • Result in the effective use of the information collected

The Discussion Draft provides that countries establish certain “hallmarks” that will be the basis of reporting by promoters and taxpayers.

KPMG observation

Given prior experience with MDRs, these design principles are easier said than done. Additionally, if not sufficiently tailored, MDRs lead to over-reporting without additional significant improvement on the reporting of ATAs.


Reportable transactions

The Discussion Draft takes a flexible approach about which types of transactions are to be reported based on the particular concerns of the jurisdictions. The Discussion Draft, however, recommends that MDRs adopt hallmarks, any one of which triggers a disclosure requirement when present in a transaction.

The Draft Discussion recommends that MDRs include “generic” and “specific” hallmarks. Generic hallmarks target broad features that are common to promoted ATAs that may capture a wide range of ATAs. Generic hallmarks include:

  • Confidentiality agreements—the promoter requires the taxpayer to keep the arrangement confidential
  • Contingent fees—the promoter receives fees based on the successful receipt of the tax benefits of the arrangement
  • Standardized tax products that are sold mass marketed schemes, that are not materially tailored to a client’s specific facts

Specific hallmarks are more targeted to the particular current areas of concern to tax authorities and are target at certain types of tax and economic arrangements (i.e., areas where there is a perceived high risk of ATAs). Some specific hallmarks include: arrangements to generate deductible losses (in the United States, this specific hallmark is generally tied to a threshold amount of losses depending on the type of transaction and the type of taxpayer); leasing arrangements; transactions with significant book-tax disparity; transactions of interest (identified by the tax authority); and listed transactions. In the United States, listed transactions are transactions that are the same or substantially similar to a transaction that the IRS has identified (generally by an IRS notice) as a tax avoidance transaction.The Discussion Draft does not make a specific recommendation about the inclusion of certain thresholds or de minimis exceptions that may be used to filter out certain transactions within a hallmark.

The Discussion Draft does note that these tests may help reduce the administrative burden on taxpayers, promoters, and tax authorities by filtering out small or irrelevant transactions. One type of threshold is the main benefit test (i.e., that the tax advantage is the main benefit or one of the main benefits of entering into an arrangement). De minimis filters generally filter out transaction with tax benefits below a certain monetary value. However, the draft does note that the use of a de minimis filter is not to be combined with a main benefit test threshold.

KPMG observation

A main benefit or one of the main benefits test may be easy to apply if the taxpayer has no business purpose for the transaction or the transaction lacks economic substance. However, it is not an easily applied standard in many cases. A taxpayer may have a legitimate business purpose for the transaction, but desires to structure it in a tax efficient manner. There is a question whether structuring the transaction in an otherwise permissible method or manner will trigger the main benefit or one of the main benefits test and make it a reportable transaction. This is especially difficult to apply in situations in which the provision in question was enacted or may have been enacted to provide an incentive or benefit to taxpayers. Also many transactions that have been recognized in the past by the local taxing authority as being acceptable may fall into this test.

Reporting parties

The Discussion Draft provides options for who has the primary obligation for making the necessary disclosure of a reportable transaction. In one option, the disclosure obligation either is placed on the promoter or a taxpayer. For these purposes a “promoter” is generally defined as a person responsible for or involved in designing, marketing, organizing, or managing any reportable transaction. If the promoter has the primary obligation to disclose, that obligation should pass to the taxpayer when there is no promoter, the promoter is offshore, or the promoter asserts legal privilege.

The Discussion Draft recommends that when a promoter asserts legal privilege, that promoter should be required to advise the taxpayer of the taxpayer’s obligation to disclose. The Discussion Draft also recommends that if a taxpayer does not have a reporting obligation, it still should be required to include a reference number on its tax return that relates to the scheme disclosure made by the promoter.

The other recommended approach imposes a dual disclosure requirement when both the taxpayer and the promoter separately make the required disclosures. Such a dual reporting regime likely gives rise to greater costs for the tax authority, taxpayers, and promoters, but it also may reduce the risk of inadequate disclosure.

The Discussion Draft notes the benefits of requiring the promoter to keep and disclose a list of the promoter’s clients that may be used to identify other taxpayers engaging in the same or similar tax avoidance transactions. As such, the Discussion Draft recommends requiring disclosure of a promoter’s client lists both when the promoter has the primary reporting obligation (although there the client list disclosure would be automatic) and in dual reporting regimes.


The timing of the mandatory disclosure is key to be able to address tax avoidance schemes in a timely manner. The Discussion Draft recommends that, for MDRs that impose reporting requirements on a promoter, the timing of disclosure is linked to the availability of the type of ATA. Because a quicker reporting requirement provides more time for the jurisdiction to react to the ATA and influence taxpayer behavior, the Discussion Draft recommends requiring disclosure a short time after the type of ATA becomes available.

For MDRs when the taxpayer is primarily responsible for disclosure, the reporting requirement is triggered by implementation of the ATA. Similarly, it is recommended that the timeframe for disclosure after implementation be short to give the jurisdiction more time to combat that specific type of ATA.

KPMG observation

The Discussion Draft does not define what constitutes an ATA but does recognize that many hallmarks will be present in both legitimate and abusive transactions. This often conflicts the stated goal that reporting should be clear and easy to understand and that costs should be balanced with the benefits achieved.

The fact that many hallmarks can be present in both legitimate and abusive transactions should make the taxing authority more circumspect in establishing reportable criteria. The goal should be to discover and deter taxpayers and promoters that are engaging in ATAs—not to burden taxpayers engaging in legitimate transactions with compliance costs and penalties for failing to recognize that disclosure was required. Further, requiring disclosure if just one hallmark is met may lead to over-reporting and an additional burden on taxpayers without any real improvement on reporting of ATAs. Therefore, some sort of tax benefit threshold should be reached in the current year or another year before reporting should be imposed.

These concerns are illustrated in experience with various parts of the U.S. MDR. The Draft Discussion refers to section 6662A of the Internal Revenue Code that imposes a 20% penalty (increased to 30% if there is no disclosure) with respect to a listed transaction or a reportable transaction that has a significant purpose to avoid or evade income tax. The phrase “significant purpose to avoid or evade income tax” also replaced the “principal purpose test” in the substantial understatement penalty in August 1997.

In addition to these two penalty provisions, the phrase “significant purpose to avoid or evade” also appeared in the covered opinion rules for tax practitioners in Circular 230. Notwithstanding the importance and consequences to taxpayer and tax practitioners, no further guidance has been provided to clarify the meaning of this phrase.In addition, there is an enhanced reasonable cause and good faith exception to a section 6662A penalty. The IRS issued Notice 2005-12 in January 2005 to provide interim information and guidance concerning the imposition of the section 6662A penalty and application of the reasonable cause exception. Notice 2005-12 gave limited guidance and requested comments concerning “participation in the management, organization, promotion or sale of a transaction” and “disqualifying opinion” to determine if certain tax advisers were material advisers (i.e., promoters). The IRS has not issued published guidance on these issues in the ensuing 10 years. As such, there are no bright-line, easy-to-understand tests with respect to these matters.

The Draft Discussion also refers to listed transactions as mandatory reporting in the United States. There are over 30 listed transactions, and with respect to many, it is difficult to determine the scope and reach of a listed transaction. Some listed transactions specifically name which persons identified are deemed to have participated in the listed transaction, but for many others, it is difficult to determine if all the persons described or referred to in the listed transaction are considered to have participated in the listed transaction.

However, the consequences for failure to disclose are very severe, with significant penalties imposed and an extended statute of limitations even if the transaction is upheld as non-abusive. Application of the listed transaction rules is made more difficult by the expansive definition of “substantially similar” which provides that this phrase includes a transaction that involves different entities or uses different Internal Revenue Code provisions.

Domestic taxpayers and international taxpayers having effectively connected income from a trade or business in the United States or U.S. source income have significant and burdensome reporting obligations to the United States. In addition to the reporting of their income, they have many forms and schedules that report or disclose their ownership or activities with various entities and transactions. This can often lead to duplicative reporting and compliance costs. For example, a taxpayer may be required to disclose a reportable transaction under Reg. section 1.6011-4 on a Form 8886, Reportable Transaction Disclosure; a Schedule M-3, Net Income (Loss) Reconciliation; and a Schedule UTP Statement. Although the IRS has often stated that it would consider reducing various duplicative reporting, it does not happen very often.

Thus, it may be recommended that taxing authorities be cautious in introducing new MDRs to avoid establishing an over-inclusive MDR that must be scaled back later. Such later adjustment to remedy over-reporting is unlikely and the over-reporting is costly to taxpayers, promoter, and the tax authority without significantly improving the identification of ATAs.

International Tax Schemes

Challenges in the international context

Most MDRs are not well-designed to capture cross-border transactions for a number of reasons. For example, cross-border arrangements generate multiple tax benefits in different jurisdictions that, on the whole, may be significant, but in isolation are unremarkable. This ambiguous nature means that MDRs that are focused on domestic tax outcomes may not identify many cross-border ATAs.

Additionally, a threshold filter based on a main benefit test may not capture the aggregate tax consequences and benefits because of its domestic tax focus.

Furthermore, cross-border tax schemes are frequently client specific, and are not as likely to be identified by generic hallmarks the same way standardized tax schemes are marketed domestically. Thus, in the cross-border context, new specific hallmarks should be included to identify the kinds of outcomes that raise tax policy concerns rather than the techniques used to accomplish them.

Changes may also need to be made as to who has a reporting obligation, as some parties may not be subject to tax in the reporting jurisdiction and the tax authorities are unlikely able to enforce such obligations. However, when a foreign party that is part of the same controlled group has the relevant information to be disclosed, the domestic reporting party should be able to access and report that relevant information.

Recommendations for cross-border MDRs

Based on these principles, the Discussion Draft makes the following recommendations for a cross-border MDR:

  • Develop specific hallmarks that focus on the risks posed by cross-border tax planning (but that are wide enough to capture different and innovative tax planning techniques)
  • Identify a reportable transaction as an arrangement involving a domestic taxpayer and the arrangement has a cross-border outcome
  • Remove threshold filters (like the main benefits test)
  • Require a taxpayer to disclose a tax arrangement when the cross-border outcome arises within the same controlled group as the taxpayer or when the taxpayer was a party to the arrangement
  • If a taxpayer does not have sufficient knowledge or information to provide a complete disclosure, the taxpayer must identity the persons with such information and certify that the taxpayer has requested such information in writing

More specifically, the Discussion Draft provides several new hallmarks that may be used in the international context. These hallmarks focus on hybrid transactions or transactions with conflicting treatment in different jurisdictions—for example, transactions with conflicting tax treatment of a hybrid instrument or entity that results in a deduction with no income inclusion or a double deduction; an asset transfer that gives rise to a conflict of the treatment of ownership of the asset in different jurisdictions; or deduction or similar relief resulting from a deemed or actual transfer of value for tax purposes that does not give rise to tax consequences in the jurisdiction of the counterparty.

Additionally, a domestic taxpayer should be treated as involved in an arrangement with a cross-border outcome when the transaction has material economic consequences for that taxpayer or material tax consequences for either party to the transaction which will have a material impact on the taxpayer’s tax reporting position. Materiality could be determined by a threshold monetary amount.

KPMG observation

The international proposals still rely on a domestic MDR based reporting requirement that may capture a significant amount of transactions (by removing a main benefit test threshold) and generally may not be suited to the practical landscape of cross-border transactions. The number of parties that may be required to disclose a transaction may be significant (as most transactions involve multiple domestic and foreign advisers) and the transaction itself also may result in few actual tax benefits in the reporting jurisdiction.

Furthermore, taxpayers are often already inundated with reporting requirements relating to international ownership (direct, indirect, and constructive) and international transactions.

In the United States, multiple forms are already required to be filed—Forms 5471, 5472, 926, 8865, 8858, 8938 3520, and FBARs just to name a few. The rules relating to filing of these forms can be very complex and penalties significant if there are failures.

Unless a tax authority rationalizes any new reporting requirements with its current reporting regimes (by removing duplicative reporting and reviewing whether the information currently being received is useful and being used in a meaningful manner), taxpayers can expect to have duplicative reporting requirements and increased compliance costs without a significant improvement in the tax authority’s deterrence of ATAs.

Consequences of failure to comply with MDR

The Discussion Draft recommends making clear in a jurisdiction’s domestic law that disclosure under an MDR does not imply acceptance of the ATA or its purported benefits. Additionally, note that merely being a reportable transaction does not necessarily prove that a transaction is a tax avoidance transaction. Furthermore, to enforce compliance with an MDR, the Discussion Draft recommends some sort of monetary (e.g., daily or monthly penalty fees, penalties based on proportionate amount of tax savings) or non-monetary penalties that fit within the relevant general domestic law.

KPMG observation

While disclosure does not per se indicate that a transaction is an ATA, disclosure under an MDR generally has negative reputational and commercial consequences even if the transaction is found not to be abusive. Thus taxpayers (particularly multi-national companies) need to be aware of the increased obligations and costs that come with a tax authority changing an existing MDR or adopting a new MDR.

With respect to penalties, the Discussion Draft indicates that most MDR penalties in the United Kingdom and United States are not imposed if the taxpayer can show reasonable cause and not carelessness or deliberate failure to report. It has been observed that there may often be a failure to apply the reasonable cause standards in a fair manner. For example, the IRS has a current policy to impose a $10,000 penalty for each late Form 5471 or 5472, even if there is no underreporting of income, and the administrative policy of the IRS effectively forecloses any relief from the penalty.

Additionally, taxpayers need to be aware that as tax authorities face budget cuts and smaller staffs, it appears that automatic penalties without proper consideration of reasonable cause defenses may become more common.


While the Discussion Draft sets out the principles of balancing compliance costs with the benefits of mandatory disclosure and establishing clear and understandable rules, it does not generally provide significant guidance on how to tailor MDRs to achieve those principles. In practice, the development of existing MDRs, such as that in the United States, generally has been a long process with multiple complex iterations that have imposed significant compliance costs on domestic taxpayers and their advisers. While certain types of mass-marketed and truly abusive tax schemes may be prevented by an MDR, the Discussion Draft does not adequately address the potentially massive compliance costs and risks that are potentially magnified in the cross-border context (especially for large multinational taxpayers and their advisers).

Comment on the Discussion Draft are due by 30 April 2015, and prudent taxpayers need to consider how these proposals may impact them.

Additionally, the OECD will have a public consultation meeting on 11 May 2015 in Paris which may be another opportunity for taxpayers to weigh in on the Discussion Draft.

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