EU: Disclosure of reportable cross-border arrangements | KPMG | GLOBAL

EU: Proposed mandatory disclosure of reportable cross-border arrangements

EU: Disclosure of reportable cross-border arrangements

The European Commission (EC) today announced a proposal for amending a directive on administrative cooperation in the field of taxation (Directive 2011/16/EU). The proposal introduces a requirement that intermediaries disclose potentially aggressive cross-border tax planning arrangements and includes instructions for tax administrations to exchange this information. The enhanced transparency requirement is a consequence of recent revelations on harmful tax practices and the use of offshore companies (e.g., the “Panama Papers”) and disclosure rules proposed by the OECD in the base erosion and profit shifting (BEPS) Action 12.

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As noted in an EC release, the proposal introduces a requirement for intermediaries to disclose potentially aggressive tax planning arrangements to their tax authorities. The tax authorities subsequently then will exchange this information automatically with other tax authorities. The proposal does not dictate penalties, but leaves it to the EU Member States to implement effective, proportionate, and dissuasive penalties.

Reportable cross-border arrangement

The proposal targets aggressive tax planning arrangements. The proposal does not contain a definition of the term “arrangement.” As a consequence, it is not clear whether the proposal only targets general, marketable "product-type” structures, or whether regular tax advice is also targeted by the proposal.

The term of “aggressive tax planning” is not defined. However, an annex to the proposal lists a number of “hallmarks” that present a strong indication of tax avoidance or abuse. A cross-border arrangement becomes reportable if it meets one or more of the hallmarks. 

Hallmarks

The hallmarks are divided between generic and specific hallmarks. 

  • Generic hallmarks relate to the engagement between the intermediary and the taxpayer. Examples are confidentiality conditions in relation to other intermediaries or the tax authorities and/or fees that are contingent upon the amount of tax advantage derived from the arrangement. 
  • Specific hallmarks refer, for example, to the use of losses; the conversion of income into another category of revenue taxed at a lower level; deductible cross-border payments that benefit from a preferential tax regime at the level of the recipient; when the recipient of the deductible payment is resident in a jurisdiction that imposes corporation tax at less than half the average rate in the EU or in a jurisdiction included on the EU blacklist. 

Mismatches within the scope of the second Anti Tax Avoidance Directive (ATAD 2) as regards hybrid mismatches with third countries are also listed as a hallmark, among other things.

Reporting requirement

The burden of reporting cross-border arrangements falls to the intermediary. An intermediary is the person or entity that carries the responsibility vis-à-vis the taxpayer for designing, marketing, organizing or managing the implementation of a reportable cross-border arrangement in the course of providing services relating to taxation. If there is no intermediary, the obligation to disclose then falls on the taxpayer that uses the arrangement. This can be the case, for example, because the taxpayer designs and implements an arrangement in-house, when the intermediary does not have a presence within the EU, or when the intermediary cannot disclose the information because of a legal professional privilege.

When to report

Intermediaries need to disclose the reportable cross-border arrangements within five working days after the arrangement becomes available for implementation. The subsequent automatic exchange of information must take place every three months. The information must be communicated for the first time by the end of the first quarter of 2019.

Information to be exchanged

The information that must be exchanged includes: 

  • Identification of taxpayer and of the intermediary
  • Details of the hallmark(s)
  • The date of implementation
  • The value of the transactions or series of transactions included in the reportable cross-border arrangement
  • Identification of involved EU Member States and identification of any person in the other EU Member States likely to be affected

Effective date

The measures will be effective after approval by European Parliament and ECOFIN, and EU Member States are to implement the proposal by 31 December 2018 at the latest and apply the new legislation as from 1 January 2019.

KPMG observation

The proposal goes beyond the recommendations of BEPS Action 12 and proposes a broad range for the exchange of information. Among concerns (apart from confidentiality and privacy issues) are the fact that a crucial term in the draft proposal—the term “arrangement”—is not defined at all. As a result, it is not clear whether regular tax advice, for example regarding the conversion of a loan into equity or vice versa, regarding the prevention of tax loss evaporation or regarding changes in a value chain, is within the scope of the proposal. A board range of transactions may potentially fall within the scope of the Directive.

 

Read a June 2017 report prepared by the KPMG member firm in the Netherlands

 

Read a June 2017 report prepared by KPMG's EU Tax Centre

 

Read a June 2017 report prepared by the KPMG member firm in Luxembourg

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