What has happened?

On 5 October 2015 the OECD issued its final paper on BEPS Action 12 Mandatory Disclosure Rules, Action 12 - 2015 Final Report (Paper). In this Alert we highlight the main issues and recommendations for taxation reform raised in the Paper.

The Australian Treasurer's BEPS Press Release on 6 October 2015 noted that the ATO is considering the costs and benefits for Australia of the mandatory disclosure rules recommended in the Paper. This is an area that may well result in reform in Australia potentially leading to further tax reporting for Australian taxpayers.

For risk governance purposes, Boards should keep aware of the ATO's recommendations in relation to this Paper.

What are mandatory disclosure rules?

The Paper provides a framework that a regime for providing tax authorities with early information on potentially aggressive or abusive tax planning strategies. The rules of other countries are drawn upon in the paper, especially the United Kingdom's Disclosure of Tax Avoidance Schemes (DOTAS) regime which stated to have been successful in reducing tax avoidance schemes. Specific recommendations are also made for targeting international tax schemes.

Overview of mandatory disclosure

The Paper states the main objectives of mandatory disclosure rules are

  • to obtain early information about potentially aggressive or abusive tax avoidance schemes
  • to identify schemes, and the users and promoters of schemes in a timely manner; and
  • to act as a deterrent to reduce the promotion and use of avoidance schemes.

To achieve these objectives, the design of mandatory disclosure regimes have to address the following questions:

  • who has to report (eg taxpayers/users and /or planners/promoters/advisors);
  • what has to be reported (ie what types of scheme is a 'reportable scheme', which will be broader than a tax avoidance scheme, and what information needs to be disclosed);
  • when information is reported;
  • what other obligations (if any) should be placed on promoters and/or scheme users (eg disclosure rules can require promoters to provide client lists);
  • what are the consequences of non-compliance;
  • what are the consequences of disclosure;
  • how to use the information collected.

The Paper recognises that each country's approach will vary but the suggests that the key design principles for mandatory disclosures rules are that:

  • they should be clear and easy to understand;
  • they should balance additional compliance costs to taxpayers with the benefits obtained by the tax authority;
  • they should be effective in achieving the intended policy objectives and accurately identify relevant schemes; and
  • information collected should be used effectively (ie setting up a process to identify potential tax policy and revenue implications)

Other disclosure initiatives including:

  • private rulings regimes (which are considered limited in their usefulness as a source of information on tax avoidance);
  • additional reporting obligations (usually as part of the return filing process);
  • surveys and questionnaires by tax authorities;
  • voluntary disclosure (as a means of reducing penalties); and
  • co-operative compliance programmes (where taxpayers agree to provide full disclosure of material 
    issues and transactions).

are concluded to have different objectives to mandatory disclosure and lack the broad scope of a mandatory disclosure regime in a compulsory way. It is considered that those regimes also do not provide the information early enough to allow tax authorities to respond to tax policy and revenue risks (eg through legislative changes).

Mandatory disclosure regimes exist in the US, Canada, South Africa, the UK, Portugal, Ireland, Israel and South Korea and these regimes, especially DOTAS, are considered to have been effective in providing early information about tax avoidance schemes with many being closed down by legislation and the number of schemes caught by the disclosure rules has reduced. A table comparing these regimes is included as an annexure to the Paper.

Design recommendations for mandatory disclosure rules

The Paper makes the following recommendations in relation to the basic design questions referred to above.

Who has to report

The options are that both the promoter and the taxpayer have the obligation to disclose separately, or either the promoter or taxpayer has the obligation to disclose. The Paper recommends (like in UK, Portugal, Ireland and South Africa) that if the primary reporting obligation falls on the promoter, that reporting obligation should switch to the taxpayer where the promoter is offshore, there is no promoter, or the promoter asserts legal professional privilege. A definition of 'promoter' (or 'advisor') is also recommended.

What has to be reported (ie what is a reportable scheme)

The options are a single-step approach (ie a transaction is reportable if it falls with the descriptions or hallmarks set out in the regime) or a multi-step or threshold approach (ie some regimes such as UK, Ireland and Canada first apply a threshold or pre-condition that a scheme must satisfy before it is assessed against the hallmarks, eg a threshold test of whether the main benefit of the scheme was obtaining a tax advantage). Alternatively, or in addition, a de minimis filter could be used (eg in the US reportable loss transactions have dollar amount thresholds).

The Paper recommends that the hallmarks which trigger disclosure are a combination of general and specific hallmarks.

General hallmarks should include:

  • a requirement of the promoter/adviser to keep the scheme confidential; and
  • a premium or contingent fee required to be paid to the promoter/adviser.

Specific hallmarks should reflect the particular risks and issues in individual countries. For example they may include loss making schemes (US, UK, Canada, Ireland, Portugal), leasing transactions (UK), schemes involving entities located in low-tax jurisdictions (Portugal), arrangements involving hybrid instruments (South Africa) or transactions with significant book-tax differences (US).

It is recommended that where a scheme triggers a hallmark that should be sufficient to require disclosure.

When information is reported

The options for the timing of disclosure are a timeframe linked to availability of a scheme (ie the point at which a promoter makes a scheme available) or a time frame linked to implementation.

The Paper recommends that where the promoter has the obligation to disclose, then the timeframe should be linked to availability of the scheme. Where a taxpayer has to disclose it is seems sensible and is recommended that the disclosure is triggered by implementation rather than availability.

Other obligations to be placed on promoters or users

Where the primary reporting obligation is on the promoter, it is recommended that client lists are required in order to fully identify all individual taxpayers/users of a scheme. Where a country requires that both the promoter and the taxpayer report then it is recognised that client lists may not be as essential but they are likely to assist in cross-checking and quantifying risks.

Consequences of disclosure

The Paper recommends that, as in the existing regimes, it is made clear that the disclosure of a transaction does not imply any acceptance of that transaction or its purported tax benefits. This was to address concern that a disclosure may lead to an implicit agreement that the scheme is valid if there is no response to the contrary from the tax authority.

Consequences of non-compliance

The Paper recommends that financial penalties apply for non-compliance but countries are free to introduce penalty provisions that are consistent with their domestic penalty provisions. Non-monetary penalties could also be applied (for example in the US publicly trade companies are required to disclose the requirement to pay a monetary penalty for failure to disclose).

Use of the information collected

The Paper notes that the ways in which tax authorities can use the information collected include counteraction through:

  • legislative change (eg in the UK there have been numerous tax law changes informed by DOTAS disclosures);
  • risk assessment and audit; and
  • communication strategies (eg publications/tax alerts of schemes being considered).

The Paper recommends that in order to use the information collected effectively, tax administrations set up a small unit to risk asses the disclosures received and co-ordinate action within and across the tax taxing authorities.

International tax schemes

The Paper notes mandatory disclosure regimes which focus exclusively on domestic tax outcomes for domestic taxpayers without understanding the global picture may not capture cross-border tax planning schemes. To address this, the Paper recommends that specific hallmarks be included for targeting international tax schemes, and this could include for example hybrid mismatch arrangements (which may also be caught under BEPS Action 2). It also recommends that disclosure of an international tax scheme by a domestic taxpayer should only be required if it has a material tax impact on the reporting jurisdiction, and if the taxpayer could reasonably have been expected to be aware of the cross-border outcome (eg if it is a party or it arises in their group).

The Australian position

Australia has introduced some disclosure initiatives. For example the reportable tax positions schedule to income tax returns for large companies, the adoption of the common reporting standard and the proposed country-by-country reporting by multinational groups which is discussed in our earlier Alert Multinational anti-avoidance and country-by-country reporting introduced, and tax transparency laws which require the ATO to publish certain information about companies with a total Australian income of $100 million or more. Australia also has a promoter penalty regime but unlike the recommendations in this Paper that regime does not require disclosure by promoters. None of these disclosure initiatives are like a mandatory disclosure regime.

The ATO is considering the costs and benefits for Australia of the mandatory disclosure rules recommended in the Paper and it seems very possible that such a regime could be introduced in Australia. The Paper notes that the recommendations are not a 'minimum standard' and countries are free to choose whether to introduce mandatory disclosure rules.

If the recommendations are adopted in Australia they would expand the disclosure initiatives that have already been introduced in Australia.