Obligation to notify cross-border tax structuring models
Update on national and international developments
The article provides an overview of the adopted EU draft directive on the notification obligation for cross-border tax structuring models. It presents its fundamentals and highlights uncertainties and obligations that can trigger tax risks for tax advisors and clients.
In June 2017, the EU Commission drafted a proposal to supplement Directive 2011/16/EU, which provides for a notification requirement for certain cross-border tax structuring models. The notification obligation primarily affects the tax advisor, who is referred to in the draft as the intermediary. However, it may also affect the advised client under certain circumstances. The notification obligation and the cross-border exchange of information between the Member States are intended to enable the tax authorities to become aware of cross-border arrangements at an early stage in order to be able to take appropriate countermeasures against model tax shifting.
The following article takes a critical look at the draft EU directive, which was finally adopted in March 2018, and shows the scope for legislative action in the upcoming transformation of the directive into national law. At the same time as the vote on the directive, the Conference of Finance Ministers in Germany introduced a national reporting obligation for domestic arrangements, the key points of which are also presented below.
Reporting obligation on cross-border arrangements and exchange of information
Back in June 2017, the EU Commission presented a proposal for an amendment to the existing Directive 2011/16/EU on administrative cooperation between the tax administrations of the individual countries in the area of taxation. This supplement regulates the automatic exchange of information on cross-border tax arrangements. In a first step, the tax authorities are to obtain early knowledge of tax arrangements that have certain predefined characteristics by means of mandatory notifications. In a second step, the reports received are to be exchanged between the member states on a quarterly basis.
After a voting process, the ECOFIN Council reached a political agreement on the content of the directive on 13.03.2018. The corresponding draft will be adopted without further changes after translation into the official EU languages and can thus be classified as final.
Signs of reportable models
The signs of reportable models are laid down in the Annex to the Directive. Among others, the following signs are listed:
general (formal) contract features, e.g., contracts in which the advisor is compensated pro rata based on the tax benefit arising from a proposed design;
special contractual features, e.g. arrangements in which tax losses are used for other transactions;
cross-border features, e.g., arrangements in which the beneficiary is resident in a state where the tax rate is (almost) zero.
The aforementioned cases always lead to a duty of disclosure if it can be reasonably assumed that the tax advantage resulting from the design is the main reason or one of the main reasons for the design. Regardless of their expected effect, models, for example, are subject to notification under the following conditions:
Participation of states on the list of uncooperative states;
Use of preferential tax regimes;
Undermining the automatic exchange of information;
Use of so-called safe harbor rules in transfer pricing;
Transfer of intangible assets that are difficult to value.
However, the EU Directive does not provide a definition of the term "model". Accordingly, this includes to cover any cross-border design that has any of the characteristics mentioned in the Directive, regardless of whether this design has a model character, i.e. can be applied to different taxpayers without major adjustments.
Disclosure period and information provided
The draft directive agreed upon by the member states has the following timelines and content:
Disclosure Timelines:
The notification period for notifiable designs is 30 days after the design has been passed on by the intermediary to the client for implementation (previously: 5 days). It is irrelevant whether the model is actually implemented later.
Content of the message:
The message must on the one hand abstract data on the design model in question, e.g. an overview of the design, details of the tax rules affected by it, and information on the other member states (possibly or actually) affected.
On the other hand, also sensitive data of the taxpayer and the consultant are passed on. This includes, for example, name, date of birth and
-place, tax residency and tax identification number (TIN), information about the taxpayer's related entities, as well as information about the value of the design (not yet further defined) and about other persons affected by the design.
Transfer of the duty of notification to the taxpayer:
If the intermediary is subject to a statutory duty of confidentiality, as is the case in Germany for the tax advisory professions, the Member State must examine whether the person subject to the duty of confidentiality is to be exempted from the reporting obligation. In this case, the advised taxpayer, as a "relevant taxpayer", becomes subject to the reporting obligation himself. In this case, the intermediary has the duty to immediately inform the taxpayer of his duty to inform. The client, in turn, must report the arrangement within 30 days after receipt of the arrangement information (previously: 5 days after implementation of the arrangement).
Deadlines
The directive must be incorporated into national law by Dec. 31, 2019. Intermediaries and tax subjects must fulfill their information obligations as of 01.07.2020. The first exchange of EU Member States on the data received nationally in each case is to be completed on 31.10.2020.
Need for clarification of implementation at national level
For its application, the directive must be transferred into national law. In formulating the corresponding draft law, it is primarily also necessary to give concrete form to various provisions of the EU Directive. In this context, the following aspects appear to be of particular relevance for the taxpayer:
In Germany, lawyers, tax advisors, certified public accountants and auditors, among others, are subject to a statutory duty of confidentiality, e.g., pursuant to Section 203 of the German Criminal Code (StGB). Therefore, a suitable provision must be made in the national implementation of the Directive to resolve the conflict between the duty of confidentiality and the obligation to report. In the event of an exemption from the reporting obligation, the obligation of the aforementioned professional groups to inform their affected clients without delay of the transfer of the reporting obligation must also be specified.
The design of the Sanctions in the event of a breach of the duty to report is to be determined individually by the member state. The EU requirements merely state that the sanctions should be effective, appropriate and dissuasive. Here, we can hope for a sense of proportion on the part of the legislator.
National push for a supplementary notification requirement for domestic tax models
In addition to the notification requirement for cross-border arrangements described above, a notification requirement for national tax models is also being discussed in Germany. According to a key issues paper of the Conference of Finance Ministers of March 2018, the structure of this provision is to be based on the EU Directive presented or its national implementation. However, there are some Differences with the EU Directive:
The report on domestic structuring models should always be made by the intermediary. In order not to violate the professional obligations regarding confidentiality of the tax advisory professions, no data about the taxpayer should be passed on in the process, but only anonymized information about the design.
In addition, each design should only have to be reported once. However, it is unclear how this is to be implemented, as the tax authorities have so far not wanted to publish any information on the reported models, which means that advisors cannot obtain information on the factual designs that have already been reported.
The reporting obligation is initially to be limited to clearly definable income tax constellations. An extension to the areas of inheritance, gift and real estate transfer tax is being examined.
Outlook and conclusion
The objective of the EU Directive to combat cross-border tax evasion for the benefit of general tax justice can be considered positive in principle. However, the national implementation in particular still shows potential for the legislator and may lead to an unreasonable burden for the tax advisor and the taxpayer. The criticism in detail:
Due to the confidentiality obligations of the tax consulting professions in Germany, under certain circumstances a Extensive transfer of reporting obligations to the advised taxpayers itself to be expected. Since the taxpayer of the same Deadline of 30 days after receipt of the design is subject to, notification may be necessary even before a final decision has been made on the application of the proposed design model.
The Extent of sensitive information of the taxpayer and the advisor to be reported. give rise to a critical assessment, since data security must be ensured in all member states due to the periodic exchange of data between EU states.
Since no draft national implementation has yet been published, it is unclear how extensive the Sanctions and how the transition of the reporting obligation will be structured.
It is also uncertain whether the still rather open definition of "tax model" will be further specified. Based on the wording of the draft directive, it can currently be assumed that many cross-border situations fulfill the characteristics listed in the draft directive and must be reported accordingly. Due to the broad definition, it can be assumed that The tax advisors and the companies they advise can be expected to be significantly impaired in their day-to-day business.
Both the The transition of the reporting obligation as well as the vagueness of the definitions lead to a considerable increase of the compliance risk for the taxpayer. This must be taken into account accordingly in its tax compliance management system in order to avoid sanctions.
Germany's planned extension of the EU-law notification requirement to include national arrangements is viewed extremely critically. According to an expert opinion commissioned by the German Federal Chamber of Tax Advisors (BStBK), there are considerable doubts about the constitutionality of the proposal that has become known so far. The proposal also leads to a one-sided obligation to inform the tax advisory professions without corresponding information from the tax authorities about the consequences drawn from the reports.