EU Mandatory Disclosure Regime (MDR)
Disclosure requirement for cross-border tax arrangements
EU DAC 6 Directive introduces disclosure requirements for cross-border tax arrangements
On 25 June 2018, EU Directive 2018/822 amending 2011/16/EU (Council Directive on administrative cooperation in the field of taxation) on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements entered into force. Briefly, the Directive – also known as DAC 6 – requires intermediaries (and in some circumstances taxpayers) to report information on certain cross-border tax arrangements to the tax authorities if the arrangements contain specific hallmarks. The objective of these EU-wide disclosure requirements is to combat potentially aggressive tax planning through greater transparency. Member States will be able to identify potentially harmful structures at an earlier stage, with faster adaptation of tax laws helping to prevent erosion of the country's tax base. Although the focus is on aggressive or potentially aggressive arrangements, the scope of the Directive is very broad and may also trigger disclosure requirements with regard to standard arrangements which are known to be legal and common transactions with a cross-border dimension.
EU Member States must transpose DAC 6 into national law by 31 December 2019. The new regulations are applicable from 1 July 2020. The first exchange of information among the EU Member States will start on 31 October 2020.
Although the Directive does not yet apply and a specific transposition law is still pending at this stage, urgent attention is needed because the disclosure requirements have retroactive effect.
They already apply to cross-border arrangements where "the first step in the implementation" took place between the Directive's entry into force on 25 June 2018 and the start date for application on 1 July 2020. The relevant reports must be submitted by 31 August 2020.
Status of legislative process: German tax authorities aiming to extend disclosure requirements
The legislative process to implement DAC 6 in Germany has already begun. In September 2018, the Federal Ministry of Finance drew up an internal consultation draft on transposing DAC 6. On 30 January 2019, a first draft bill was introduced for inter-ministerial consultation. The current draft bill suggests that transposition of the Directive will largely be closely aligned with the existing wording, although it does diverge in key points from the previous consultation draft. In particular, it proposes an extension of disclosure requirements to purely domestic tax arrangements.
This would mean that the national transposition law includes an aspect not envisaged under DAC 6. Although the final version of the transposition law is still outstanding, it is apparent that the German tax authorities are aiming not only at comprehensive transposition of the Directive, but also at extending its content.
The following overview summarises what will change for taxpayers and their advisors as a result of DAC 6 and the anticipated German transposition law.
What circumstances must be disclosed?
The material scope of the disclosure requirements essentially includes specific types of tax, the cross-border arrangement, and certain hallmarks of the arrangement.
Type of tax covered
The disclosure requirement for cross-border tax arrangements includes income tax, corporation tax, trade tax, inheritance tax, gift tax and real estate transfer tax. It does not cover (import) VAT, customs duties and harmonised excise duties (such as taxes on energy, electricity, spirits and tobacco), social security contributions and fees.
Cross-border nature of the arrangement
DAC 6 stipulates that arrangements are subject to disclosure if certain cross-border criteria are met, such as more than one EU Member State being involved or, under certain circumstances, a Member State and a third country.
Hallmarks of the arrangement – overview
A cross-border arrangement is reportable if it includes at least one specific hallmark within the meaning of DAC 6. With regard to the hallmarks of an arrangement, a distinction must be made between hallmarks which are subject to disclosure irrespective of any tax advantage provided by the arrangement, and hallmarks which only apply if the "Main benefit"-test is satisfied. This relevance test is regarded as largely satisfied if the expected main advantage or one of the main advantages of the arrangement is the obtaining of a tax benefit.
Overview of hallmarks for the disclosure requirement of cross-border tax arrangements according to DAC 6 – hallmarks according to Annex IV Part II Category A–E. The information on draft regulations of the Fiscal Code (Abgabenordnung – AO-E) refers to section 138 e of the AO-E for cross-border arrangements and section 138 j of the AO-E for domestic arrangements, as provided for in the current draft bill of the Federal Ministry of Finance dated 30 January 2019 for transposition of DAC 6.
Outlook: possible disclosure requirements for purely domestic tax arrangements
With regard to the disclosure requirement for domestic tax arrangements provided for in the draft bill of 30 January 2019, the material scope of application is narrower and limited to purely domestic tax arrangements.
The types of taxes affected by the domestic disclosure requirement are income tax and corporation tax, trade tax, inheritance or gift tax and real estate transfer tax. In contrast to the disclosure requirement in an international context, the hallmarks of the disclosure requirement for domestic tax arrangements are less extensive and only apply in conjunction with the main benefit test. It is thus an essential requirement that the arrangement seeks to obtain a tax advantage.
In addition, there will be certain restrictions on the disclosure requirement for domestic tax arrangements due to user-specific requirements. For example, the intention is that the disclosure requirement for domestic tax arrangements will only apply if at least one user:
- is a natural person whose total positive income exceeds EUR 500,000, or
- belongs to a group within the meaning of section 17 of the Stock Corporation Act (Aktiengesetz – AktG), or
- together with other domestic companies is controlled or uniformly managed by a foreign natural person or legal entity, a plurality of persons, a foundation or other special-purpose assets, or is economically linked to a foreign company, or
- is subject to tax audits which are generally consecutive for reasons other than those set out above.
Who does the disclosure requirement for tax arrangements apply to?
The disclosure requirement for cross-border tax arrangements mainly applies to intermediaries. This means primarily any person who designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border tax arrangement. The reporting requirement is linked to involvement in the various stages of tax planning, from its origin through to implementation. DAC 6 further stipulates that under certain conditions assistance and support services will also have to be disclosed. In Germany, the draft bill of 30 January 2019 does not provide for a disclosure requirement for auxiliary intermediaries. In other EU Member States (e.g. Poland), however, auxiliary intermediaries are subject to the requirement.
Classification as an intermediary does not depend on belonging to a particular professional group. In addition to members of the legal, tax and auditing professions, in practice financial services providers such as banks, fund initiators and insurance companies as well as asset and investment advisors including family offices may be affected by the disclosure requirements. In addition, group financing companies in particular may also be subject to disclosure requirements.
The intermediary must also be linked to EU jurisdiction, e.g. by being domiciled in an EU Member State or by operating a permanent establishment in a Member State, through which services are provided for the arrangement in question. If the intermediary has a specific domestic connection to Germany (e.g. is domiciled in Germany), it is also subject to reporting requirements in Germany. A tax arrangement may be subject to reporting requirements in more than one EU Member State if an intermediary has a domestic connection in more than one EU Member State, or if several intermediaries with different domestic connections are involved in the arrangement. With regard to the disclosure requirement of a (domestic) intermediary, it is also irrelevant whether Germany itself is affected by the cross-border tax arrangement or whether the effects occur solely outside the country.
An intermediary can avoid double reporting by providing proof that it has already duly complied with its own disclosure obligation in another EU Member State, or that the relevant information on the same reportable arrangement has already been provided by another intermediary.
If there is no intermediary subject to disclosure requirements, for example, or if the intermediary is (partially) exempt from disclosure requirements due to professional secrecy obligations, e.g. in the case of lawyers, tax advisors and auditors, the users (taxpayers) of the tax arrangement may be subject to disclosure requirements under certain circumstances. A user is considered to be any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement an arrangement of this type or has implemented the first step of such an arrangement.
Specifically, in the case of cross-border tax arrangements that a taxpayer themself designs for their own use (in-house arrangements), the rules applicable to intermediaries apply accordingly to the user. In this case, the taxpayer is subject to an independent disclosure requirement. In other EU Member States, the user may have to ensure that the intermediary complies with its disclosure obligations, otherwise the disclosure requirement may revert to the user.
How and when are disclosure obligations to be fulfilled?
The disclosure obligations under DAC 6 apply in principle from 1 July 2020. Intermediaries or taxpayers must comply with their disclosure obligation within 30 days after the occurrence of the reportable event (in practice, it may be difficult to establish this date precisely). They must submit the information electronically to their competent tax authority, using the officially prescribed data record.
From there, the reports are automatically forwarded to the German Federal Tax Office. The data is then entered into the secure central directory set up by the EU Commission. The automatic exchange of information between EU Member States will start on 31 October 2020, using this platform.
It is important to note that cross-border tax arrangements are subject to a retroactive disclosure requirement during the transitional period between the entry into force of DAC 6 and its start of application. In other words, if the first step of a reportable cross-border tax arrangement was implemented after 24 June 2018 and before 1 July 2020, it must be reported retroactively by 31 August 2020. For this reason, intermediaries and taxpayers should already be looking closely at the requirements of DAC 6, even in the absence of a specific transposition law. In particular, reportable or potentially reportable arrangements should already be documented (internally) as a precautionary measure, in order to be able to comply properly with the retroactive reporting obligations in 2020.
What data must be disclosed?
In addition to abstract information about the intermediary, the relevant hallmarks and the content of the arrangement, the data record must also contain individual information about the user and the other persons concerned, as well as the date of implementation.
A particular practical challenge is the requirement to provide details of the relevant legislation of all EU Member States involved and information on the (projected) value of the cross-border arrangement.
Only in the event that the intermediary is subject to a statutory (i.e. not a contractual) obligation to maintain confidentiality, without having been released from this obligation by the user, can intermediaries be exempted from disclosure requirements, on condition that the intermediary has informed the user of this in advance. In Germany, however, the current state of discussions suggests that this will only be partly possible.
In addition, the user will be required to indicate on their tax return that a cross-border tax arrangement has been implemented. The intermediary must inform the user of the registration number of the relevant arrangement for this purpose.
Penalties for breaching reporting requirements
If a reportable cross-border arrangement is not reported, incorrectly reported, incompletely reported or reported too late, fines of up to EUR 25,000 may be imposed for each single breach, according to the current plans of the German legislature. It is not possible to tell at this stage whether this will change and whether it will be waived with regard to the retroactive period.
In other EU Member States, penalties are likely to be considerably tougher in some cases. In Poland, for example, there is already the threat of payments that far exceed the German fines.
In addition to disputes with the tax authorities, professional advisors could easily also suffer reputational damage. Even if the intermediary fulfils its disclosure requirements, there is a strong case for having an agreed communication strategy in place with regard to the tax arrangements as part of a general commitment to corporate social responsibility.
MDR – what are your duties?
Intermediaries face challenging duties even at this stage due to the (retroactive) disclosure requirements. These include:
- Identification of all potentially reportable arrangements in which you are involved as an intermediary. This also applies to arrangements implemented in the retrospective period from 25 June 2018 to 30 June 2020.
- Collection of relevant data on potentially reportable arrangements.
- Identification of the specific disclosure requirement on the basis of the DAC 6 hallmarks and, if applicable, the “main benefit“ test, as well as documenting the results of both reportable and non-reportable arrangements.
- Identification of and coordination with other intermediaries involved, including determining whether the disclosure by the other intermediary has actually been made (requirement of proof of exemption from disclosure requirement for the arrangement).
- Making the disclosure and informing the taxpayer (user) that disclosure has taken place.
- Establishment of efficient internal processes for identification, analysis and documentation of reportable arrangements as part of a functioning compliance management system. This requires the definition of clear lines of responsibility and communication. It should be noted that setting up and configuring an IT-supported reporting system may take several months in some cases.
- Provision of key information (kick-off event) and regular training courses for responsible employees on all matters relating to disclosure obligations.
How can CMS support you?
Our international organisation allows us to provide expert assistance both locally and throughout Europe.
Our services are carefully tailored to your requirements and include coverage of the following areas:
- Assessing the impact of the disclosure requirements on your company, including analysis of your business models
- Specific analysis of individual arrangements and products with regard to any disclosure requirement
- Systematic support for identifying, assessing, documenting and notifying reportable tax arrangements by means of guidelines and checklists
Help with self-help
- Training employees on their disclosure duties and assessing disclosure responsibilities
- Advice around designing and introducing compliance management systems that meet MDR criteria and protect against penalties in the event that disclosure requirements are breached
- Coordination with international CMS offices in the case of disclosure requirements in other/multiple EU Member States
- Local representation in disputes with tax authorities, including in other EU Member States.