On 21 June 2017, the European Commission presented a proposal for a Council Directive on the mandatory automatic exchange of information in the field of taxation related to reportable cross-border arrangements. Further details may be found in our Tax Alert 2017-11.

The proposal, which amends the Directive on administrative cooperation in the field of taxation (DAC 6), introduces an obligation on intermediaries to disclose potentially aggressive tax planning arrangements and to subsequently exchange this information between tax administrations.

During the meeting on 13 March, the ECOFIN debated and voted in favour of a revised proposal. This proposal contains, in particular, amendments to the initial text presented by the EU Commission regarding the scope of reportable cross-border arrangements. The amendments are a response to concerns from some Member States of over-reporting.

The key amendments related to the disclosure procedure are as follows:

• The definition of an intermediary subject to the reporting obligation is clarified and broadened to include any person who designs, markets, organises, makes available for implementation, or manages the implementation of a reportable arrangement. It also covers those persons who know or could reasonably be expected to know that they have undertaken to provide assistance with respect to a reportable arrangement.
• In case of multiple reporting obligations, e.g. if an intermediary is required to file the information in several Member States, or if several intermediaries are involved, the compromise text details where and how the filing should take place.
• The reporting obligation rests explicitly on all intermediaries, and exemption from filing is granted only to the extent that proof can be provided that information has already been filed.
• If there is no intermediary, the obligation to disclose shifts to the taxpayer for whom the arrangement was designed. Clarifying rules are also provided in cases of multiple filing obligations for the taxpayer.
• Following concerns expressed by some Member States, it was explained that the absence of a reaction by tax authorities to a reported arrangement does not imply acceptance of the validity or tax treatment of such arrangement.
• The originally proposed retroactive effect, which was widely discussed, is limited, but maintained. Only arrangements implemented between the date of entry into force (20 days after publication of DAC 6 in the official journal) and the date of application (1 July 2020) of DAC 6 will have to be reported by 31 August 2020. This means that some structures implemented (or transactions made) as from summer 2018 may need to be reported to the authorities 2 years later, i.e. in summer 2020.

Similar to the European Commission’s initial draft, no definition of the concept of ‘aggressive tax planning’ is provided.

However, the annex to the Directive provides a number of ‘hallmarks’ that are a strong indication of tax avoidance or abuse.

A cross-border arrangement becomes reportable, if it meets one or more of the hallmarks (consisting of five headings, A through E), while certain hallmarks can only be taken into account if a ‘main benefit’ test is also satisfied.

• The main benefit test is extended and redrafted along the lines of the principle purpose test in BEPS Action 6. It is satisfied if 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 generic hallmarks (heading A) mainly relate to the engagement between the intermediary and the taxpayers (e.g. success fee).
• The specific hallmarks that are covered by the main benefit test refer, for example, to certain acquisitions of a loss-making company, the conversion of income into a category of revenue taxed at a lower level, or circular transactions (heading B). Deductible cross-border payments that benefit from a preferential tax regime or a tax exemption (including being subject to a zero, or almost zero corporate income tax rate) are also covered (heading C). It has, however, been clarified that the mere presence of these conditions does not imply that the main benefit test is satisfied.
• Specific hallmarks that do not have to meet the main benefit test include transactions where the recipient is not tax resident anywhere or in a jurisdiction included on an EU or OECD blacklist. Other examples include hallmarks concerning arrangements designed to circumvent rules on the automatic exchange of financial information and beneficial ownership (heading D) and hallmarks concerning transfer pricing, for instance arrangements which involve the use of unilateral safe harbour rules or the transfer of hard-to value intangibles (heading E).
• The much-debated provision authorising the European Commission to amend the hallmarks through delegated acts is deleted and an assessment of the hallmarks’ relevance is introduced every two years.

According to the amended Directive, intermediaries are required to file information on reportable cross-border arrangements within 30 days beginning from the day of implementation, whereas the original proposal called for reporting within 5 days.

Finally, the text of the Directive is accompanied by a statement from the Council supporting international cooperation in this field.

The final text of the Directive is expected to be formally adopted without further discussion in the next couple of months. Member States will then have to implement the Directive by 31 December 2019, and apply its provisions on 1 July 2020. Information on cross-border arrangements—of which the first step was implemented between the date of entry into force (20 days after publication of DAC 6 in the official journal) and the date of application (1 July 2020) of DAC 6—will have to be reported by 31 August 2020.

The reported information will be automatically exchanged each quarter by the competent authorities of each Member State via a central directory on administrative cooperation, to be developed by the Commission by the end of 2019. The automatic exchange of information will take place within one month of the end of the quarter in which the information was filed, with the first information having to be communicated by 31 October 2020.
 

The new disclosure requirements will impact (tax) intermediaries and taxpayers engaged in cross-border transactions and arrangements.

In this respect, the EU Directive goes beyond the OECD recommendations on BEPS Action 12, in particular in light of the Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures published on 9 March 2018. It is also remarkable that a certain number of terms are not clearly defined in the Directive, and in particular the term ‘arrangement’, a term crucial to the Directive, leaving the door open for varying interpretations.

It remains to be seen how Member States will implement the rules and whether the Luxembourg tax authorities and other local tax authorities will issue clarifying guidance. Intermediaries and taxpayers should therefore carefully monitor the developments in this respect and start preparing to comply with the new reporting requirements, taking into account its retroactive application as from the date of entry into force of the Directive (which is expected to occur in the coming months).