Cross-border tax confusion
UK tax professionals’ responses to consultation on new rules to implement an EU directive highlight the uncertainty Brexit has created over the direction of anti-avoidance policy, reports Andrew Goodall.
Automatic exchange of information on ‘reportable cross-border arrangements’ is now mandatory. This follows the introduction of EC Directive 2018/822 EU (known as DAC 6), which amended Directive 2011/16/EU on administrative cooperation in the ﬁeld of taxation.
EU member states are required to adopt laws to implement DAC 6 by 31 December 2019, and to apply those laws from July 2020. HM Revenue & Customs (HMRC) set out its intended approach in a July 2019 consultation. Intermediaries (as deﬁned) will be required to disclose to HMRC certain cross-border arrangements that “could be used to avoid or evade tax”, and that information will be shared with tax authorities in every EU member state in a secure central directory.
Draft regulations indicated the new obligation will apply to an arrangement if the ﬁrst step in its implementation was made on or after 25 June 2018, as required by the directive. But as the UK heads for a 12 December general election, it was not clear whether a post-Brexit UK government would go ahead with the reform.
“The UK is currently an EU member state and is therefore working to implement these rules,” HMRC said in July. But it added that leaving the EU “will not reduce the UK’s resolve to tackle international tax avoidance and evasion”, and the UK will continue to apply international standards.
“Given the hostile public attitude towards multinationals avoiding tax, it seems likely that the next government will want to go ahead with these rules,” Catherine Robins, partner at Pinsent Masons, told Financial Accountant.
“HMRC will also be keen to ﬁnd out whatever it can about tax avoidance structures as a result of disclosures under these rules and so is likely to be pressing for their introduction. What is not clear, however, is how streamlined the information exchanges between tax authorities will be if the UK cannot access the EU’s central database after Brexit.”
Robins said a signiﬁcant problem with the new rules is that a very wide deﬁnition of “intermediary” means that, for any arrangement that is caught, there are likely to be a number of service providers and professional advisers who potentially have an obligation to disclose the arrangement to HMRC.
“The tight timescales and heavy penalties for non-compliance in the current draft regulations are likely to lead to signiﬁcant duplicate reporting,” she said.
HMRC recognises that not all arrangements disclosable under the new regime will be used for tax avoidance.
The preamble to DAC6 set out the rationale for the reform. EU member states ﬁnd it increasingly diﬃcult to protect their tax bases from erosion as tax planning structures “have evolved to be particularly sophisticated” and often take advantage of increased mobility of capital and people in the EU internal market, HMRC said, adding such structures commonly consist of arrangements “developed across various jurisdictions”.
Reporting “potentially aggressive” cross-border tax-planning arrangements can contribute eﬀectively to an environment of fair taxation, the preamble suggested. Rather than attempting to deﬁne “aggressive” tax planning for this purpose, the directive used a series of criteria and hallmarks indicating a “potential risk of tax avoidance”.
Cliﬀord Chance partner Dan Neidle suggests that the “superﬁcial similarity” of DAC6 to the disclosure of tax avoidance schemes (DOTAS) regime is misleading.
“Only a small minority of advisers will ever be involved in tax avoidance schemes that require DOTAS disclosure. However, the fact that DAC6 only has a ‘main beneﬁt’ test for some of its hallmarks means that transactions with no tax motivation at all may be caught,” he said.
“Take, for example, a simple intragroup reorganisation where all the assets of a property holding company in one jurisdiction are transferred to an entity in another jurisdiction. This is, bizarrely, reportable under hallmark E3 [of DAC 6]. Identifying and reporting all such transactions will be a headache for advisers and commercial parties alike. HMRC is sensibly taking a pragmatic view – but it cannot depart from the wording of the directive, which means we all have to live with rules that are in some respects poorly thought through,” Neidle added.
The draft regulations are “exceptionally broad” and cast the net signiﬁcantly wider than DOTAS, says George Bull, senior tax partner at RSM UK.
“Worse, the draft regulations lack focus and will result in a large amount of unproductive time being spent by businesses and advisers meeting compliance obligations,” he said. Many innocent transactions are likely to be reported to HMRC, potentially setting it a “needle in a haystack” task, Bull argued.
The absence of a “main beneﬁt” test for some hallmarks is a particular concern because they appear to catch transactions occurring in the ordinary commercial course of business.
“HMRC should go back to the drawing board to produce narrow, targeted regulations which apply only to situations where tax may be lost, and which operate through clear and simple reporting requirements,” he said.
Andrew Goodall is a freelance tax writer and journalist