By K. Treppides & Co. Limited
It is a well-known fact that a storm is always preceded by a strange calm. This could be the perfect description of what is about to come, as a result of the latest changes adopted on May 25th of this year by the Council of the European Union.
The changes come in the form of an amendment to the Directive on Administrative Cooperation (DAC) in relation to Mandatory Disclosure Rules (MDR’s) on potentially aggressive cross-border arrangements. In short, intermediaries and taxpayers alike, will now have the obligation to report to the respective Tax authorities, all cross-border arrangements that fall into broadly defined categories (called Hallmarks) of transactions that contain one or more elements that could lead to tax avoidance.
This development is a direct offspring of the BEPS (Base Erosion Profit Shifting) action plan (Action 12) masterminded by the OECD on the direct instructions and political support of the G20. These mandatory disclosure requirements are likely to create havoc due to their retroactive application as from June 25th 2018, despite the fact that the date of coming into force is July 1st 2020!In simple words, arrangements that have either started, are available for implementation or have been implemented as from June 25th of 2018 onwards, must be retroactively reported to the Tax authorities by the 31st of August of 2020 if they fall into any of the hallmarks described below. This information is reported to the Tax authorities of the respective Member State (MS) which will then automatically exchange this information each quarter, via a central directory, between the Tax authorities of all EU Member States.
Reportable cross-border arrangements that present any of the following attributes and characteristics of possible tax avoidance, are divided into five distinct categories better known as hallmarks. Although not the purpose of this article to delve into the technical details surrounding each hallmark, it is nevertheless necessary to at least outline the basic philosophy of each one.
The first hallmark aims to capture arrangements that require the taxpayer to comply with confidentiality clauses and not disclosing such information to the Tax Authorities or cases where a fee is paid to the intermediary based on the level of tax savings achieved (contingent fee) for the taxpayer. Also covers cases where standardized documentation is completed aiming to minimize tax exposure with a “one size fits all” approach.
The Second hallmark tackles arrangements that aim to utilise losses that a company would not under normal circumstances be entitled to, or by converting trading income into a capital gain or a gift, thus altering its nature and achieving a lower tax rate. Also covers instances of setting up circular transactions that result in the round-tripping of funds for achieving a lower level of tax due.
The third hallmark covers arrangements that aim to shift profits to zero or low tax jurisdictions, are payable to companies that are tax resident nowhere or benefit from a preferential tax regime such as patent boxes or special economic zones.
The fourth hallmark aims at arrangements that aim to circumvent the automatic exchange of information or conceal the identity of the real beneficial owner of the income.
Last but not least, the fifth hallmark has a transfer pricing aroma and tackles arrangements that use unilateral safe harbor rules, hard to value intangibles or are involved in moving around functions, risks and assets within a group to achieve a lower tax rate for the group overall.
July 1st 2020 is the first day for reporting such arrangements to the Tax authorities and there is a 30 day period for doing so. Above deadline not to be confused with reportable arrangements that fall under the retroactive reporting deadline which is August 31st 2020.
K. Treppides & Co Ltd, the largest independent consulting firm, with established international presence and offices in London and Malta, offers a full range of legal, tax, accounting, consulting and financial advisory services to international Investors that are operating within a wide range of industry sectors.The company possesses many years of experience and a team of experienced members of staff who remain on hand to assist individuals and businesses throughout the entire investment process, in and through Cyprus.
Principal, Audit Department