EU Directive on mandatory disclosure for intermediaries

Publication March 13, 2018

EU Directive on mandatory disclosure for intermediaries

The EU Member States have today endorsed the Commission’s proposals for a directive forcing intermediaries to disclose cross-border tax arrangements which are seen as tax aggressive. The proposals are intended to apply from July 2020 and will impose a significant additional burden on tax advisers and other intermediaries. The proposals were originally announced by the Commission in June 2017 and were designed to apply to any intermediary who devises or promotes an arrangement that bears one of certain specific hallmarks. The definition of intermediary  casts a wide net, and includes, among others, consultants, lawyers (including in-house legal counsel), accountants, financial advisers, financial institutions, trust companies and insurance intermediaries.  Such a person has to disclose details of the arrangement to its domestic tax authority; these are then automatically exchanged among the member states.

The proposals are modelled on the UK DOTAS regime, but in places go beyond that. They are part of the Commission’s proposals to combat tax avoidance and promote tax transparency. While generally this has been welcomed,  there are various issues coming out of the proposals:

What is the threshold for disclosure?

The threshold for disclosure under the Directive is very wide. The use of hallmarks as a test for whether disclosure has to be made is not a new approach; it has been used in the UK’s DOTAS regime for over a decade. However, the experience of the UK has shown that it is important that it is clear when disclosure has to be made. This relies on there being a clear distinction between “ordinary” tax planning and planning that in the Commission’s words “indicate a risk of tax avoidance or evasion”. The hallmarks listed in the Annex to the Directive are widely-drawn;  while they are more tightly drawn than originally announced, there will still be room for debate. While there is in some cases an additional hurdle – a main benefit test, experience has again proven that this is difficult to apply in practice. It is to be hoped that Member States make it clear when implementing the provisions into their domestic law what is caught, so that there is a high degree of certainty.

Who is the person that ultimately bears the burden of disclosure?

The responsibility for disclosure rests with the intermediary; unless the intermediary is prevented from doing so pursuant to legal professional privilege or no intermediary is involved, in which case the burden shifts to the taxpayer.

What are the penalties for non-compliance?

It will be for each individual Member State to decide what penalties are to be imposed at a national level for non-compliance with the Directive or with any national provisions adopted pursuant to the Directive; and as such, the nature and scope of the penalties are, at this stage, unspecified. Member States will have to decide whether the penalties go beyond financial penalties; there has been discussion in the Netherlands that a “naming and shaming” approach will be taken.  If this is to be introduced, it is important that appropriate safeguards are in place to make sure that this is applied fairly and after due process.

How does this fit into other proposals?

Member States will have to consider how best to implement these proposals into their domestic law. It is noteworthy that the OECD are also looking at mandatory disclosure rules for structures designed to circumvent CRS (Common Reporting Standard) requirements and using “opaque offshore arrangements”.

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