Under these rules, intermediaries and, in some cases, taxpayers have an obligation to automatically report to their local tax authorities on reportable cross-border arrangements which concern taxes imposed by an EU Member State (other than VAT, customs duties and social security contributions) and which involve one or more of a list of specified hallmarks.

The new regime will therefore apply to individuals and corporate entities. The information reported to local tax authorities will be automatically exchanged between all EU tax authorities.

While reporting will not begin until late 2020, reporting will apply to arrangements the first step of which happens on or after 25 June 2018. Though difficult to predict with certainty, it is not expected that Brexit will affect reporting obligations in respect of Northern Irish and other United Kingdom (UK) taxpayers.

This new reporting regime is much broader in scope than the UK’s Disclosure of Tax Avoidance Schemes (DoTAS) rules with fewer exemptions or filters. It includes reporting of cross-border arrangements that have no tax benefit. Many taxpayers have calibrated their tax policies to not engage in transactions that may fall within the scope of the DoTAS regime. A similar approach will likely not align with the scope of reporting under the EU Mandatory Disclosure Regime.

A “cross-border arrangement” is defined as meaning an arrangement concerning either two or more EU Member States or one or more EU Member States and a third country where at least one of the following conditions applies:

• Not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction; or
• One or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction; or
• One or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment; or
• One or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction; or
• The arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

Note that an arrangement can exist between third parties or connected parties.

Where a cross-border arrangement exits, details of the arrangement must be reported to local tax authorities if the arrangement falls within certain hallmarks, as set out in the Directive.

The Directive defines a hallmark as a characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance. It specifies what arrangements are considered to fall within this definition.

Some of the hallmarks specified in the Directive are linked to a “tax main benefit” test such that reporting only applies in the event that a tax advantage is the main benefit or one of the main benefits to the arrangement (discussed more fully below). However, a number of the hallmarks are not linked to a “tax main benefit” test and, therefore, are reportable irrespective of whether or not there is any tax benefit or advantage from that arrangement.

The following is a brief summary of the types of hallmarks which are not linked to this “tax main benefit” test:

• Cross-border arrangements between 2 or more 25%+ associated persons involving a deductible payment to a recipient not resident anywhere (a “person” can include an unincorporated body or persons, such as a partnership).
• Cross-border arrangements between 2 or more 25%+ associated persons with deductible payments to a recipient resident in an EU Blacklist or OECD non-cooperative jurisdiction.
• Cross-border arrangements where there are deductions for the same depreciation on an asset in more than one jurisdiction.
• Cross-border transactions where relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction.
• Cross-border asset transfers, material difference in the consideration amount treated as payable in those jurisdictions involved.
• Specific hallmarks concerning the automatic exchange of information and the accessibility of beneficial ownership information. Broadly speaking, these hallmarks apply where steps are taken to bring information outside of the scope of the Common Reporting Standard or to conceal beneficial ownership information. 
• Specific hallmarks concerning transfer pricing. These hallmarks apply to arrangements that involve the use of unilateral transfer pricing safe harbour rules, arrangements involving the transfer of hard-to-value intangibles between associated enterprises and arrangements involving the intra-group transfer of functions, risks or assets (where it is projected that there will be a significant decrease in earnings in the jurisdiction from which the transfer is made subsequent to the transfer).

As you will have seen, the above hallmarks are potentially wide in scope and could apply to many transactions where there is no tax advantage created.

In addition to the above hallmarks, there are a series of other hallmarks which only trigger reporting where it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.

The Directive does not define what a “tax advantage” is. Until such time as further guidance is issued, a good reference point may be the definition of tax advantage under UK DoTAS rules which is as follows:

• relief or increased relief from, or repayment or increased repayment of tax, or the avoidance or reduction of a charge to tax or an assessment to tax or the avoidance of a possible assessment to tax,
• the deferral of any payment of tax or the advancement of any repayment of tax, or
• the avoidance of any obligation to deduct or account for any tax;

As noted above, an advantage in relation to tax relates to any tax levied by an EU Member State (other than VAT, customs duties and social security contributions).

The hallmarks where this “tax main benefit” test must be satisfied can be summarised as follows:

• Condition of confidentiality in respect of how the arrangement could secure a tax advantage.
• A fee which is fixed with reference to a tax advantage.
• Arrangements including substantially standardised documentation / available without need for substantial customisation.
• Arrangements that include contrived steps related to loss-making companies.
• Converting income into capital, gifts or other categories of lower taxed revenue.
• Circular transactions resulting in round-tripping of funds or offsetting or cancelling transactions. 
• Cross-border transactions involving a deductible payment made between 2 or more associated persons where the recipient jurisdiction has no tax or a zero or almost zero tax rate, or the receipt has a full exemption from tax or the payment benefits from a preferential tax regime in the recipient’s residence jurisdiction.

The definition of “intermediaries” is widely drafted and includes any person that designs, markets, organises, makes available for implementation, or manages the implementation of a reportable cross-border arrangement. It also includes any person that, having regard to the relevant facts and circumstances and based on available information and the relevant expertise and understanding required to provide such services, knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement.

Only persons with an EU nexus (such as being incorporated or resident in, or having a permanent establishment in, an EU Member State or being registered with a professional association related to legal, taxation or consultancy services in an EU Member State) can be intermediaries.

Unlike the existing Irish and UK domestic reporting regimes this will mean that reporting may be required by persons who are not primarily engaged in the provision of tax services e.g. corporate service providers, fund managers, etc. In-house teams could also be intermediaries as one company within a taxpayer group could be an intermediary with respect to other members.

While the Directive specifically contemplates multiple reporting by multiple intermediaries, it does state that where an intermediary has proof that another intermediary has already reported the transaction then it is exempt from making a filing itself. It is not yet clear what will constitute proof in this regard.

Where there is no intermediary, the reporting obligation falls on the “relevant taxpayer” (i.e. any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement).

This might arise, for example, where a taxpayer procures advice from a non-EU adviser (as noted above only persons with an EU nexus can be intermediaries) or where it (or its employees) designs or implements the arrangement itself.

The Directive provides for the possibility of an intermediary waiving its obligation to report where doing so would breach the legal professional privilege applicable under the local law of that EU Member State. Where this occurs, that intermediary is under a legal obligation to inform any other intermediaries that it is applying this waiver thereby placing the obligation on those other intermediaries to report. In the absence of any other intermediaries, the reporting obligation falls on the relevant taxpayer.

Where a reporting obligation arises, the information which an intermediary will be obliged to report in respect of the arrangement concerned will include information identifying the taxpayer(s) involved in the arrangement (including names and tax reference numbers), details of the hallmarks which make the cross-border arrangement reportable, a summary of the content of the reportable cross-border arrangement, details of the relevant tax provisions involved, the value of the arrangement, and the identification of any other person in EU Member State likely to be affected by the arrangement.

Although the first reporting will not occur until 2020, arrangements the first step of which occurs on or after 25 June 2018 will be reportable in August 2020 (with reporting occurring more frequently thereafter). Consequently, it will be necessary for intermediaries, and where applicable, taxpayers to collect information on such reportable cross-border arrangements commenced on or after 25 June 2018 for the purposes of reporting them to their domestic tax authority.

It is understood that the main objective of the new regime is to provide EU tax authorities with early intelligence on new and innovative cross-border tax planning arrangements and how they work as well as planning to circumvent disclosure of information under the Common Reporting Standard on financial products and non-disclosure of beneficial ownership of entities.

In seeking to pursue this objective, the scope of the Directive has been cast very wide. This potentially may result in onerous reporting obligations for a broad range of intermediaries and taxpayers. Furthermore, as the Directive does not appear to provide any scope for excluding small transactions or transactions which involve “routine tax planning” (such as the exclusions that exist in the Irish and UK mandatory reporting regimes), compliance will potentially involve the reporting of transactions which are well known to, and understood by, the tax authorities concerned.

Furthermore, the fact that reporting applies to arrangements, the first step of which is implemented, on or after 25 June 2018 means that it is extremely difficult to determine whether or not the interpretation applied by affected taxpayers and intermediaries and hence the information collected and collated will accord with that ultimately required by the relevant tax authorities in August 2020. This is because taxpayers and intermediaries are required to interpret the Directive (which includes many undefined terms) before any legislation or guidance is published which may not be for some time.

This position is further exacerbated by the fact that, as these rules are in the form of a Directive, it means that individual EU Member States will have to implement their own legislation and interpretation thereon. This will likely result in significant variation in in the scope of reportable transactions across different EU Member States such that one may find that a transaction might not be reportable in one country but is reportable in another. This merely increases the level of compliance and administration for taxpayers.

If you have any queries on EU mandatory disclosure, reporting obligations, cross-border arrangements, or any of the issues raised here, please get in touch via this form.