EU Mandatory Disclosure Regime (MDR)
Disclosure requirement for cross-border tax arrangements
(Last updated: 11 October 2019)
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 the German legislative process
The legislative process currently under way to implement DAC 6 has reached the next stage in Germany with the draft bill of 9 October 2019.
Back in September 2018, the Federal Ministry of Finance drew up an internal consultation draft on transposing DAC 6. On 30 January 2019, a first (unpublished) draft bill was distributed for inter-ministerial consultation. Unlike the working draft, the draft bill provided for an extension of the disclosure requirements to cover purely national tax arrangements. The Federal Ministry of Finance and legislators have now backed away from this and a disclosure requirement for national tax arrangements is no longer to be included in the DAC 6 transposition law. However, it remains to be seen whether the Federal Ministry of Finance will take up the issue of a disclosure requirement for national arrangements again in future draft legislation.
In terms of content, the draft bill barely differs from the official draft bill of 26 September 2019 and its predecessor of 30 January 2019. Apart from changes to the structure of the bill, clarifications and editorial corrections, the latest draft bill suggests that transposition will largely be closely aligned with the wording of the Directive.
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, at least one Member State and one or more than one 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. Proof of substantial non-tax advantages will not be sufficient as proof to the contrary, according to the explanatory notes. Rather, it will be necessary to demonstrate that the tax benefit is not a main benefit of the arrangement.
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; based on current draft bill of 9 October 2019 scheduled for transposition by section 138e of the Draft Fiscal Code (Abgabenordnung-Entwurf – AO-E).
Who does the disclosure requirement for tax arrangements apply to?
The disclosure requirement for cross-border tax arrangements mainly applies to intermediaries. According to the proposed legal definition, this means primarily any person who designs, markets, organises or makes available for use a reportable cross-border tax arrangement, or who manages its implementation by third parties. The reporting requirement is linked to involvement in the various stages of tax planning, from its origin through to implementation. Having said that, someone who has only been involved in implementing individual partial steps of a cross-border tax arrangement without knowing it and without reasonably being expected to know it, will not be regarded as an intermediary, according to the explanatory notes.
Nor does classification as an intermediary 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.
With regard to the intermediary, there is a deviation from the Directive in that DAC 6 further stipulates that, under certain conditions, assistance and support services must also be disclosed. In Germany, the draft bill of 9 October 2019 (still) 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.
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. However, the draft bill makes it clear in this respect that there is no cross-border tax arrangement if only the intermediary is domiciled in Germany and the other parties involved in the tax arrangement are domiciled in the same foreign state.
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 user designs for their own use (in-house arrangements), the rules applicable to intermediaries apply accordingly to the user. In this case, the user 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 the Federal Tax Office (BZSt), using the officially prescribed data record.
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 up to and including 30 June 2020, it must be reported 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.
The details are to be laid down in the principal procedural regulations, section 138f and section 138g of the Draft Fiscal Code (AO-E), for intermediaries and users. Section 138f (3) sentence 1 of the AO-E stipulates for the intermediary, and under section 138g of the AO-E analogously for the user, that the data record must include the following abstract information (numbers 1 and 4 to 9) and individual information (numbers 2, 3 and 10):
For each data record received, the Federal Central Tax Office (BZSt) will assign a registration number ("ArrangementID") to the cross-border tax arrangement and a disclosure number for the report received ("DisclosureID"). The intermediary must also inform the user of these numbers. One of the reasons for this is that the user will be required to indicate in their tax return that a cross-border tax arrangement has been implemented; to do so, the user must state the registration and disclosure number.
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, intermediaries can be exempted from disclosure requirements in certain circumstances. In Germany, however, this exemption will be implemented only in part. This means that with regard to the "abstract information" (numbers 1 and 4 to 9), the intermediary always remains subject to disclosure requirements, even if under an obligation to maintain confidentiality. Only the requirement to disclose the individual information (numbers 2, 3 and 10) may pass to the user if the intermediary has informed the user in advance about the option of exemption from the obligation to maintain confidentiality and the transfer of the disclosure requirement, and has provided the user with the necessary information specified in numbers 2, 3 and 10 as well as the registration and disclosure number, insofar as the user is not aware of this information.
To the extent that the intermediary is aware that at least one other intermediary, in addition to itself, is subject to a requirement to disclose the same cross-border tax arrangement within the scope of this legislation or in another Member State of the European Union, it must also include in the data record the information referred to in number 1 with regard to the other intermediaries known to it. In this case, the disclosing intermediary must also inform the other intermediaries promptly that it has sent the data to the Federal Central Tax Office (BZSt).
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 retroactive 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.