I. Duty of disclosure under Directive 2018/822

Due to the revelations on Panama Papers and Paradise Papers in recent years, the EU legislator sees a need for action with regard to a duty of disclosure with regard to cross-border tax-planning arrangements.

1. Aim of the Directive

The duty of disclosure is intended to “create transparency and improve early access by public authorities to the correct information in order to counter harmful structures which distort the smooth functioning of the market through distortions and lack of fairness and lead to a decline in tax revenues in Member States”. The introduction of a mechanism with a deterrent effect is cited as the most important objective. This should prevent intermediaries from designing and marketing potentially aggressive tax-planning arrangements.
In addition, the Directive pursues the legal policy objective of identifying possible loopholes in legislation at an early stage so that they can be closed accordingly. The planned reporting system is also intended to ensure that the tax authorities share the relevant information with their counterparts in the other Member States after reporting. Exchanges should be carried out through the Common Communication Network (‘CCN’) developed by the Union.

2. Reportable Persons

According to recital (8) of the Directive, “the reporting obligation should be placed upon all actors that are usually involved in designing, marketing, organizing or managing the implementation of a reportable cross-border transaction or a series of such transactions, as well as those who provide assistance or advice”. The European legislator is already pointing out at this point that various reporting obligations might not be enforceable due to a statutory obligation of confidentiality. The Directive therefore provides that the Member States must take measures to ensure that the relevant taxpayer is subsequently responsible for submitting information on a reportable cross-border arrangement.

3. Reportable arrangements

According to Article 3 No 19 of the Directive, a cross-border tax-planning arrangement subject to reporting requirements exists if it contains at least one of the hallmarks listed in Annex IV. These hallmarks are divided into five categories. The “main-benefit test” “will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage”. The other three specific hallmarks do not necessarily have to have such a main benefit.
a) Generic hallmarks linked to the main benefit test
These include structuring models in respect of which the taxpayer or another party to the arrangement undertakes to comply with a condition of confidentiality which may require them not to disclose how the arrangement could secure a tax advantage vis-à-vis other intermediaries or the tax authorities. This also includes arrangements where the intermediary is entitled to receive a fee, the amount of which is calculated on the basis of the tax advantage obtained or which is made dependent on the attainment of a tax advantage. Furthermore, this also includes arrangements that have substantially standardized documentation and/or structure and are available to more than one relevant taxpayer without a need to be substantially customized for implementation.
b) Specific hallmarks linked to the main benefit test
This includes all arrangements whereby a participant in the arrangement takes contrived steps which consist in acquiring a loss-making company, discontinuing the main activity of such company and using its losses in order to reduce its tax liability. It also includes those arrangements that has the effect of converting income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax. In addition, those arrangements which includes circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features must also be reported.
c) Specific hallmarks related to cross-border transactions
These refer to arrangements that involve deductible cross-border payments made between two or more associated enterprises where at least one of the following conditions occurs:

• The recipient is not resident for tax purposes in any tax jurisdiction;
• although the recipient is resident for tax purposes in a jurisdiction, that jurisdiction either does not impose any corporate tax or imposes corporate tax at the rate of zero or almost zero; or is included in a list of third-country jurisdictions which have been assessed by Member States collectively or within the framework of the OECD as being non-cooperative;
• the payment benefits from a full exemption from tax in the jurisdiction where the recipient is resident for tax purposes.

The reporting requirement also applies to arrangements that include an application for exemption from double taxation for the same income or assets. In addition, arrangements are notifiable if they provide for a transfer of assets in respect of which there is a material difference in the value of the asset in the jurisdictions concerned.
d) Specific hallmarks concerning automatic exchange of information and beneficial ownership
The hallmarks relating to automatic exchange of information refer to arrangements which may have the effect of undermining the reporting obligation under the laws implementing Union legislation or any equivalent agreements on the automatic exchange of Financial Account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements. In addition, it includes arrangements that have an “intransparent chain of legal or beneficial owners”.
e) Specific hallmarks concerning transfer pricing
These include arrangements that

• use unilateral safe harbor rules;
• involve the transfer of hard-to-value intangibles; or
• involve an intra-group cross-border transfer of functions and/or risks and/or assets if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 % of the projected annual EBIT of such transferor or transferors if the transfer had not been made.

4. Reporting Deadlines

The reporting must take place within 30 days, beginning

• on the day after the reportable cross-border arrangement is made available for implementation; or
• on the day after the reportable cross-border arrangement is ready for implementation; or
• when the first step in the implementation of the reportable cross-border arrangement has been made,

whichever occurs first.

5. Penalties

The Directive leaves the determination of penalties to the Member States. According to Art. 25a, however, penalties must be “effective, proportionate and dissuasive”.

6. Transposition into national law

The German legislator now has to transpose the Directive into national law by 31 December 2019. As early as April 2018, the Federal Ministry of Finance announced that it would examine with the Federal States how the national duty of disclosure could be taken into account when implementing the EU Directive. A Joint Working Group between the Federal Government and the Federal States has been set up to implement the Directive and to introduce the duty of disclosure at national level.

II. Duty of disclosure under national law

On 21 June 2018, the Conference of Finance Ministers approved a draft law concerning a “law on the introduction of a duty to disclose tax structures”, which would also cover domestic matters. Among other things, section 138d German Tax Code [Abgabenordnung – AO] (new) and section 379a AO (new) are to be introduced for this purpose.

1. Objectives of the draft law

The primary aim of the law is to inform the legislator and the administration about possible undesirable tax arrangements in order to identify possible legal gaps and “loopholes”. This duty of disclosure is to apply to income taxes, inheritance tax, gift tax and real estate transfer tax, among other things. Following a disclosure, a decision will be made as to whether laws need to be amended due to possible loopholes.

2. Reportable Persons

The draft law obliges companies and individuals who offer tax arrangement solutions to report them to the state. Taxpayers should then be obliged to report as soon as they wish to use tax arrangements.

3. Reportable Arrangements

A reportable tax arrangement should exist if legal regulations are combined with the objective of obtaining a tax advantage or if tax situations are implemented. Every transaction that leads to a reduction in the tax claim of the tax authorities or serves to postpone the tax claim is thus subject to the duty of disclosure. By specifying rule examples, an attempt is made to limit the number of indicators accordingly. Among other things, specific indicators are mentioned:

• Assignment of a tax-reducing circumstance to several persons
• Multiple assignment of tax-reducing circumstances to the same person
• Assignment of a tax-reducing circumstance to another person
• Creating fluctuations in profits and losses in the event of opposing tax rate effects
• Transactions with companies without economic activity
• Circular transactions of identical fungible assets
• Conversion of (taxable) income into capital, gifts or low/non-taxed types of revenue

The following cases, among others, should not be covered by the duty of disclosure:

• Arrangements which are specifically tailored to the specific hallmarks of the taxable person and cannot be transferred to other taxable persons
• Arrangements that are already evidentially known
• Zuordnung eines steuermindernden Sachverhalts zu einer anderen Person
• Arrangements which are not tailored to large companies and groups of companies
• Transaktionen mit Gesellschaften ohne wirtschaftliche Tätigkeit
• Arrangements whose tax benefit in the specific case does not exceed a cash value of EUR 50,000.00
• Arrangements concerning a taxpayer whose total positive income in two of the last three years did not exceed EUR 500,000.00

4. Reporting systems and deadlines

The disclosure is to be made to the Federal Central Tax Office a description in abstract terms of the relevant business activities or arrangements and their tax effects. It is not necessary to name he taxpayer for this purpose. The disclosure must be made within 30 days of the occurrence of the reportable event. Intermediaries must report on the number of tax arrangements implemented over a period of three years.

5. Penalties

If a disclosure was omitted or the disclosure was not made in full or within the deadline, this can be punished with a fine of up to EUR 100,000.00 (§ 379a AO new version). For consultants, the draft law provides for a minimum fine of EUR 200.00 for each day the deadline is exceeded. A fine should not be imposed if the failure to disclose has been caused by a miscalculation in the calculation of the tax benefit and the actual tax benefit does not exceed the miscalculated benefit by more than 20 %.

III. Comparison of arrangements and problems in practice

The duty of disclosure in the German draft law of the finance ministers is even broader than the duty of disclosure according to the EU Directive. Only the de minimis provisions in the national draft represent a relief. Since the national legislator has a wide margin of maneuver in implementing the Directive and only the basic objectives of the Directive have to be preserved in the national law, it is to be expected that the Transposition Act will be based on the provisions of the duty of disclosure developed for national circumstances and that it will go further than the notifiable circumstances under EU law. This makes it all the more challenging for the consulting practice to examine tax structures not only for their basic legal permissibility, but also for a possible duty of disclosure and to inform the client accordingly.

IV. Conclusion

Both the Directive itself and the national draft referendum have some uncertainties which give rise to fears that, for safety reasons, a wave of reports is to be expected, in which even everyday structures are reported in order to avoid possible sanctions. The legislator is called upon to act in this respect in order not to counteract the objectives pursued both by the Directive and by national law of transparency and avoidance of tax losses due to undesirable arrangement options with a sheer flood of data that is unclear and cannot be evaluated. Whether the notification procedure – as declared by the Conference of Finance Ministers – will be “simple and unbureaucratic” remains to be seen.