As of 25 May 2018 the EU Council has published directives amending Directive 2011/16/EU regarding the automatic exchange of information. The amendment refers to the introduction of a new reporting obligation regarding cross-border tax arrangements. The member-states are to enact laws to this effect by 31 December 2019 resulting in a reporting obligation from 1 July 2020 onwards. Thus, the German Ministry of Finance is expected to issue a respective draft law shortly.
In recent years there have been numerous initiatives to align international tax law both regarding substantive law and accompanying documentation and reporting obligations. Most prominently, the OECD in its project to counter Base Erosion and Profit Shifting has suggested various ways to limit the unwanted conduct of large multinational groups of companies. The project resulted in reports being published on 5 October 2015 containing suggestions to be put into law by the OECD member states.
As a consequence, in Germany, amongst other reforms the rules on transfer pricing documentation have been aligned with the OECD’s suggestions and in doing so have been strengthened. This includes the obligation to prepare a company specific Local File as well as a group wide Master File. In addition, the wholly new requirement for particularly large multinational groups of companies to prepare a country-by-country reporting has been introduced. Thus, following the aim of increasing taxpayer transparency documentation and reporting obligations were significantly expanded.
Against this background, the new reporting obligation regarding cross-border arrangements constitutes a further step towards achieving full transparency.
Tax arrangements to be reported
According to the EU’s directive the new reporting obligation targets so-called cross-border tax arrangements, i.e. tax arrangements that involve (at least) more than one member state or a member state and a third country. In addition, certain hallmarks have been defined that must be met for a reporting obligation to result. Some of these hallmarks only apply in combination with the so-called main benefit test that is satisfied if (one of) the main benefit(s) that may reasonably be expected to derive from an arrangement is the obtaining of a tax advantage. Specifically, the hallmarks are categorized as follows:
- Generic hallmarks linked to the main benefit test
- Specific hallmarks linked to the main benefit test
- Specific hallmarks related to cross-border transactions
- Specific hallmarks concerning automatic exchange of information and beneficial ownership
- Specific hallmarks concerning transfer pricing
Exemplarily, with regard to transfer pricing the hallmarks are considered to be met if the arrangement (1.) involves the use of unilateral safe harbor rules, (2.) involves the transfer of hard-to-value intangibles and (3.) involves an intragroup cross-border transfer of functions and/or risks and/or assets in combination with a significant drop in EBIT (50%). Thus, already judging from these exemplary hallmarks, there is a very wide range of (potentially) reportable tax arrangements.
Persons obliged to file the report
According to the directive, the reporting obligation first and foremost affects so-called intermediaries. An intermediary means any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable arrangement. In addition, this also means any person that knows or could be reasonably expected to know that they have undertaken to provide, directly or indirectly, aid, assistance or advise with respect to aforementioned activities. Thus, judging from the directive’s wording, there is a very wide circle of persons that (potentially) are affected by the reporting obligation. In particular, the directive refers to financial intermediaries and other providers of tax advice.
In this regard, the directive allows for the implementation of the right to a waiver from filing the respective information where the reporting obligation would breach the legal professional privilege (duty of confidentiality). This is particularly relevant for tax advisors, lawyers and auditors. In such circumstances, the respective intermediary (obliged to observe confidentiality) must notify any other intermediary or, if there is no such intermediary, the relevant taxpayer. Consequently, the relevant taxpayer will only be obliged to file the report in case there is no intermediary or such intermediary is obliged to observe confidentiality.
The new reporting obligation specified by EU directive is to be implemented by the member states in the course of 2019. A German draft law is expected shortly. While many details are as of yet uncertain, it is already clear that compliance requirements will strongly increase. This is will be exacerbated by the fact that the directive provides for very short reporting deadlines (30 days) and calls for effective, proportionate and dissuasive penalties to be adopted. Moreover, tax arrangements from June 2018 onwards are to be reported. Consequently, for taxpayers and (potential) intermediaries both it is strongly recommended to start evaluating potential obligations.