Consultation on UK implementation of EU mandatory disclosure rules for cross border planning

Fri 25 Oct 2019

Draft regulations and a consultation document were recently issued concerning the UK’s implementation of EU mandatory disclosure rules for cross border tax planning (see here for the EU rules). The regulations will come into force from 1 July 2020, but action is required now by affected taxpayers and intermediaries in relation to disclosable arrangements where the first step was entered into on or after 25 July 2018.

The first return covering notifiable arrangements between 25 June 2018 and 1 July 2020 will need to be made by 31 August 2020. The consultation closed 11 October 2019.

Below is a summary background to the rules and some points arising from the draft regulations. Appendix 1 sets the UK time limits for disclosure, and Appendix 2 sets out Mazars response to the UK consultation.

For further discussion or advice on the implications of these changes for your or your business, please get in touch with a member of the Mazars international tax or personal tax teams.

Background to the rules

The EU Directive requires Member States to implement rules requiring the disclosure of reportable cross-border arrangements. The reporting obligation will fall on intermediaries who design, market, organise, make available for, or manage, the implementation of reportable cross border arrangements. There is a particular definition of an intermediary, and generally employees of an intermediary would not ordinarily be required to make a disclosure themselves.

Where there is no requirement for an intermediary to report (for example if there is no intermediary or the intermediary is subject to legal professional privilege), then the relevant taxpayer will need to disclose. It may be possible for an intermediary of a relevant taxpayer to rely on a disclosure made by another party. A user of a notified arrangement will have an obligation to disclose the reference number of that arrangement for the duration it is effective.

A cross border arrangement is widely defined and requires the involvement of at least one EU member state. At this stage it is not yet known how the UK rules will be amended as a result of Brexit, but the UK Government has indicated its commitment to the principle of the application of the rules. Cross border arrangements are notifiable if they come within a hallmark.

There are five categories of hallmark (each with a number of subcategories), some (but not all) of which require there to be a main benefit of obtaining a tax advantage. A broad summary of the categories is:

A. Arrangements with confidentiality conditions, success fees based on the tax advantage, or standardised documentation;

B. Arrangements with contrived or non-commercial aspects or which convert income into capital;

C. Arrangements involving certain transactions between associated parties, or where deductions, or tax relief is claimed in more than one jurisdiction, or materially difference amounts recognised as consideration in different jurisdictions;

D. Arrangements seeking to undermine beneficial ownership or tax information exchange agreement reporting requirements

E. Arrangements involving certain transfer pricing attributes (unilateral safe-harbours or hard to value intangibles) or transfers of functions and/or risks, and/or assets where the projected EBIT of the transferor for the 3 years after the transfer is significantly lower than it would have been without the transfer.

Some points arising from the draft UK regulations are covered below. In addition to considering the UK rules, intermediaries and relevant taxpayers will also need to consider the cross border disclosure requirements in other relevant EU jurisdictions.

Reporting obligations

Reporting deadlines after the initial report can be found in the appendix below. There are slightly different reporting requirements for intermediaries and relevant taxpayers. A relevant taxpayer only has a reporting requirement where no there intermediary involved in the arrangements who is required to report. The reports must be made electronically.

There is an exception to the initial reporting requirement if the intermediary or relevant taxpayer has appropriate evidence that someone else has reported the arrangement, whether in the UK or elsewhere. Whether this can be relied on might depend on the quality of information available and whether the disclosure made by someone else covers everything that must be disclosed. Evidence will be key in demonstrating compliance in this area.

Main benefit test

The UK application of the definition of tax advantage (where it is necessary to determine this for the application of a hallmark) is based on the DOTAS definition of ‘tax advantage’ (FA 2004 s318(1)), but clarified such that it applies where the obtaining of a tax advantage cannot reasonably be regarded as consistent with the principles on which the relevant provisions that are relevant to the reportable cross border arrangement, are based and the policy purposes in the jurisdiction involved.

While the EU mandatory disclosures apply to EU taxes (other than VAT, customs duties, excise duties and compulsory social contributions), the definition of ‘tax’ for the purposes of assessing whether there is a tax advantage – includes non-EU taxes.

Employees and employer

The definition of an employee (excepted from the need to disclose) and their employer is expanded. Employee now includes employees of entities connected (closely bound by financial, economic or organisational links) with the employer.

Penalties

There are penalties for failure to comply starting from £600 per day, or one-off £5,000 penalties. However if the penalty appears inappropriately low, a First tier Tribunal can increase the penalty to up to £1m.

Whether a person knew of a disclosable arrangement

Whereas a service provider, such as a bank providing finance, does not have to do exhaustive due diligence on client activities where the financial institution is only involved with one aspect of a wider arrangement, this defence is not available to promoters (anyone involved in designing, marketing, organising or managing the implementation of an arrangement).

Relevant taxpayer

A relevant taxpayer does not have to be resident in the UK or paying tax in the UK to fall within the definition of a relevant taxpayer. A relevant taxpayer includes anyone to whom a reportable cross border arrangement is made available for implementation, or who is ready to implement or has implemented the first step of such an arrangement Limitation to application of hallmarks concerning transfer pricing

If an entity is outside the scope of the UK transfer pricing requirements, it is not necessary to assess the transfer pricing hallmarks for that entity.

Cross border transfers and the use of EBIT

Hallmark E3 assesses whether the annual EBIT of the transferred business is less than 50% of the annual EBIT had the transfer not been made. The consultation document indicates that where EBIT is not a sensible measure of operating profit, another measure may have to be used. In addition, where an entity would be projected to make a loss if no transfer had occurred, and as a result of the transfer EBIT of the transferor is expected to be nil – this does not meet the threshold for disclosure under hallmark E3.

Appendix 1 – EU DAC6 disclosure reporting time limit requirements

Appendix 2 – Mazars response to the UK consultation