For any M&A transaction completed on or after 1 June 2018, an analysis conducted by the parties should cover the potential obligation to report the transaction as a tax scheme. Mandatory Disclosure Rules (MDRs), which apply in such cases, are the result of Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements ("DAC6 Directive").
In Polish law, MDRs have been effective since 1 January 2019 and apply to events implemented after 26 June 2018 (for cross-border schemes) or after 1 November 2018 (for all other schemes). Currently, Poland is still the only country with MDRs based on the DAC6 Directive. It is also a country where penalties for non-compliance with MDRs are the highest, with the upper limit amounting to approx. PLN 25 million. These penalties are provided for in the Polish Fiscal Penal Code and apply to private individuals. Note, however, that non-compliance with procedural requirements may result in an administrative penalty of up to PLN 10 million.
MDRs were implemented into Poland's national legislation very early and, in January 2019, extensive explanatory notes were issued ("MDR Explanatory Notes"). However, as Polish tax administration authorities will not, contrary to earlier declarations, accept applications for individual tax interpretations covering MDRs and will only assign tax scheme numbers, practical guidelines on the application of MDRs are very limited. Given the risk of severe penalties for non-compliance, this may be a reason for concern, particularly in the case of large projects, such as M&A transactions.
As the MDR subject is a broad one, this article will only mention certain problems causing uncertainty in M&A transactions.
It is no secret that M&A transactions can be highly complex.
The transaction process will often be split into a number of phases, each following a different route, but all of them leading to the same goal, i.e. the purchase of an asset (a company or real property). While the initial stages of the process may be handled internally by the investor, the later stages may involve the use of different advisors, be they tax or legal consultants, or commercial advisers, or simply intermediaries hired to manage the transaction process. A bank or an insurance company may come into play, and various documents will have to be signed with them. However, the investor and the seller (and their advisers) will continue to exchange proposals, enter into agreements and negotiate contractual provisions.
Additionally, each party involved in the transaction will continue its own preparations, which may include designing the structure of the purchase or sale, or working on financing arrangements. An M&A transaction is such a complicated process that it may be difficult to determine the time when the statutory time limit for reporting the transaction begins. This difficulty is caused by the use, in statutory provisions, of language such as "making available", "being prepared for implementation" or "the first implementation act".
The "making available" requirement is rather unlikely to be met if the solution (an investment or an arrangement) was developed internally by the investor, in which case no tax scheme is made available to anyone. However, things become complicated if the investor's group of companies includes persons working as advisers to other companies (i.e. people responsible for different areas of the investment process, known as the investment committee).
Another area of uncertainty for the parties to M&A transactions is the determination of the scope of an arrangement that may potentially become a reportable tax scheme. This is an important issue, as it affects the presentation of the companies involved in the transaction, as well as the scope of an analysis to determine whether the arrangement shows any hallmarks.
An arrangement is defined as a factual act, a legal act, or a combination of both. In transactional practice, both parties enter into the same agreement (thus performing the same legal act), while each party separately will perform several other acts on its part. It is, therefore, not clear whether a particular transaction should be regarded as a single arrangement or at least two separate arrangements. The practical implications of both approaches are definitely serious. More specifically, if a transaction is regarded as a single, integrated arrangement, then it is necessary to check if the other side of the transaction involves a promoter or any other beneficiary of the scheme.
Moreover, if the arrangement is reported as a scheme, the required information will, under s.87f, have to be provided to all the entities with a reporting obligation, and this includes the other party to the transaction. Such information may include plenty of sensitive and/or confidential information that one of the parties may not want to disclose to the other party. However, the failure to make the disclosure may result in a penalty under the Polish Fiscal Penal Code.
There is also some uncertainty when verifying the presence of hallmarks. It may be particularly difficult in the case of the hallmarks set out in the Polish regulations, namely 'other specific hallmarks'. They are so unique that they are totally different from the standard hallmarks set out in the MDR Directive. The Polish regulations have adopted a financial approach, which may be problematic when making the required calculation. It is not clear what should be the basis for calculating the future income (revenue) resulting from the arrangement. Will this require dedicated forecasts? What steps should be taken if, after implementing an arrangement where, for example, the cash flows from a taxpayer that is not a resident for tax purposes are not higher than PLN 25 million (because, for example, the expected amount was PLN 20 million), the actual cash flows from the arrangement are higher?
As regards other hallmarks, those set out in the MDR Directive are not much better than the Polish ones. An M&A transaction may find it difficult to meet the definition of a typical tax scheme based on the Directive hallmarks. One example of a specific hallmark under the Directive may be the transfer of functions and/or risks and/or assets between related parties (in a way that affects the EBIT). Taxpayers wonder whether this hallmark should be regarded as satisfied in the case of a merger (where the acquirer takes over the acquiree's functions and/or risks and/or assets).
Another specific hallmark that may cause uncertainty as regards M&A transactions is one that identifies tax schemes on the basis of a transfer of intangible assets. It is difficult to determine what can be considered as an intangible asset and to what extent such asset is to be transferred, and to what degree it will determine the value of the transferred group of assets (e.g. whether this hallmark will be satisfied if what is transferred is an entire business with an identified customer database).
The complexity of any M&A transaction means that a detailed analysis is required to identify the events that may result in the obligation to report the transaction as a tax scheme to the Polish National Tax Administration Service. A transaction may, after all, involve some advisers or consultants, where the time limit for reporting begins regardless of when a tax scheme is made available or implemented, but when their advice is given. In transactional practice, given the duration of transactional processes, it may be necessary to report a tax scheme long before it is created.
As a result of the fast pace of implementing the MDR Directive into Polish legislation, without a prior, comprehensive consultation process, many practical questions are asked. The MDR Forum at the Polish Ministry of Finance may give some hope. Its role is to analyse the relevant regulations and MDR Explanatory Notes and to recommend changes to businesses and their advisers or consultants.
On 27 January, the Government Legislation Centre published, on its website, a Bill to amend the Tax Law Act, among other regulations. The Bill was discussed by the lower house of Parliament on 5 February and subsequently amended. If it becomes law, all promoters and beneficiaries who have already reported a cross-border tax scheme between July 2018 and March 2020 will be required to do it again. The reason is that the electronic report format (known as schema), adopted hastily, turned out to be inconsistent with the EU format, and because the changes are considerable, the Polish tax administration service is unable to make them on its own. As a result, the amended Bill requires taxpayers to help make the changes. Once again, no public consultations were held, and no information was provided to the MDR Forum.
Marcin K. Wiśniewski, Manager in the Tax M&A Team at KPMG in Poland
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