New EU rules which purport to clamp down on “aggressive tax planning” are set to impose a huge compliance burden on taxpayers and their advisers, potentially even in circumstances where there is no tax benefit at all.
“DAC 6”, the new EU disclosure directive, forms part of a reform package aimed at tackling tax avoidance and improving transparency and sharing of information on tax matters across the EU. It imposes obligations on “intermediaries” (broadly, anyone who designs, markets, organises, manages, aids, assists or advises on a relevant arrangement) and, in some cases, taxpayers to disclose cross-border arrangements which have particular characteristics to the tax authorities. Member states must then automatically share this information with other member states and, potentially, the Commission. The directive was inspired by the OECD’s base erosion and profit shifting (BEPS) project and existing national mandatory disclosure regimes (such as the UK’s DOTAS regime), and is designed to give tax authorities early warning of new tax schemes to enable them to act quickly to close down loopholes but also to deter advisers from coming up with such schemes in the first place. So far so good.
The EU rules are intentionally broad and, in places, may include arrangements which have no tax benefit, let alone tax motivation. For taxpayers and their advisers, putting in place procedures to track the broad spectrum of arrangements potentially caught by the rules is going to be challenging. If the directive is followed to the letter, tax authorities may find themselves swamped with disclosures on the most anodyne arrangements. This is to be contrasted with the UK’s rules which were adapted and refined following a consultation process to ensure that they were workable in practice. In addition, guidance was published which made it clear where HMRC expected (and wanted) disclosures to be made.
The first notifications under DAC 6 are not due until 2020, by which time we may know more on what tax authorities expect disclosures to cover. However, the sting in the tail is that these 2020 reports may have to cover arrangements implemented from 25 June 2018. This means taxpayers and their advisers have to start tracking arrangements now, at a time when we don’t yet know what safe harbours or exceptions will be incorporated when the rules are implemented into domestic law. For instance, will the rules be subject to any de minimis? Note also that the retroactive aspect of the rules may even be contrary to the constitution of some member states, such as Germany and Spain. A further compliance nightmare for multinationals is that the rules may be implemented differently in different member states such that a process sanctioned in one member state may not be fit for purpose in another.