Disclosure of cross border transactions is just around the corner  

Are you keeping track?

In this Business Post column, Tom Maguire discusses the disclosure of cross border transactions

I wrote in these pages about the European Mandatory Disclosure Rules in and around the same time last year. That’s when it was brought into our law by Finance Act 2019. These rules are generally known by the catchy sounding “DAC6”. Not complying means that you or your advisers could face penalties of up to €500 per day of non-compliance per undisclosed transction. As I said last year, if you do the maths that’s equivalent to a top of the range Mercedes S class per year per transaction. To quote Samuel L Jackson from Quentin Tarantino’s “Pulp fiction” - “Oh I’m sorry, did I break your concentration?”

This year’s Finance Bill is currently making it ways through the legislative process and it makes some changes to the DAC6 law, which we’ll get to in a second. The main reason for my revisiting this again is that the first disclosures will be required to be made early next year. That’s really just around the corner especially when you consider how far you have to go back.

Under DAC6, as enshrined in our law, you or your advisers may have to disclose details of certain activity to Revenue authorities (here or abroad) where you or your company transact business across borders. Last year’s Finance Act ensured this applied retrospectively to business carried on from late June 2018. All of this doesn’t bring about a tax charge but rather increased penalty bearing paperwork for taxpayers, their advisers and the Revenue authorities.

This stuff applies to humans and companies and it explains the information which has to be disclosed to the tax authorities, by when and in what form. The idea behind this is to provide authorities with an “early warning system” against transactions which tax authorities may not like so that they can legislate or react accordingly. We’ve had a similar system for domestic transctions for almost a decade. In addition, we’ve had a general anti-avoidance rule in our law since 1989 which denies tax advantages where it would be “reasonable to consider” transactions were entered into primarily for tax reasons; clearly none of this “beyond a reasonable doubt” stuff for tax based transactions in our law. We’re pretty hard on such transctions here but still we, like our European counterparts, had to implement this directive into our law and the rubber is just about to hit the road.

Before this disclosure regime can apply, there must be a cross border arrangement concerning either more than one Member State or a Member State and a third country where at least one of the following conditions is met: (a) not all of the participants are tax resident in the same country; (b) one or more of the participants in the arrangement is simultaneously tax resident in more than one country; (c) one or more of the participants carries on a business in another country through a permanent establishment (PE - think “branch”) situated there and the arrangement forms part of the business of that PE; (d) one or more of the participants carries on an activity in another country without being tax resident or creating a PE there; (e) such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership. So the net is cast quite widely.

That’s why it’s limited to “reportable arrangements” comprising cross border arrangements which meet certain criteria or hallmarks. I won’t go through the long list of hallmarks here. Some require that a tax advantage must be a main or one of the main benefits of the arrangement. The courts say that if the tax advantage is more than “icing on the cake” (their words) then tax could be a main benefit.

One of those hallmarks has the snazzy call-sign of “A3”, I know it’s a real page turner! That speaks of an arrangement where tax is more than icing on the cake and is one “that has substantially standardised documentation and/or structure” which is available to more than one taxpayer without a need to be substantially customised for implementation; the “sign here for a tax advantage” kind of thing. This year’s Finance Bill contains a list of certain tax arrangements that will not fall within this hallmark including, for example, certain pensions, PRSA and share option schemes and you can see why they’d be excluded. That’s helpful but that list contains only a dozen items and anything else will have to be analysed before the fast approaching disclosure dates.

Some hallmarks don’t have a “tax main benefit” test and are mechanical i.e. if you do this then you have no choice but to disclose. For example, one of the hallmarks comprises an arrangement containing tax deductions for the same depreciation on the asset claimed in more than one country.
This means that Revenue authorities may see many “unnecessary” disclosures given the absence of tax advantages but disclosure remains necessary under EU law.

Intermediaries have the obligation to make the disclosures to Revenue. The definition of intermediary is too long to go into here but includes “any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement”; it can include tax advisers, accountants etc. But in many instances, an intermediary may not have been used because a company uses its own in-house tax team or advice just wasn’t taken. In such instances, the disclosure requirement lies with the taxpayer and will be subject to the Bavarian car penalty for non-compliance I mentioned earlier.

It may be the case that the intermediary has to adhere to legal privilege and in that instance the disclosure may have to be made by the taxpayer. Either way, disclosure is necessary and resistance is futile given the penalties applicable. These disclosures can be exchanged with tax authorities cross border to ensure transparency of information and the integrity of the early warning system.

An additional change suggested by this year’s Finance Bill is that an intermediary or taxpayer will be exempt from making a disclosure to the Irish Revenue if they or the foreign authority (depending on who’s involved) have already received such a disclosure. Once again, this is useful but that still means that conformation be sought out. There are ducks that must be in their rows or else a penalty may be forthcoming.

The key point is that taxpayers and/or their intermediaries must ensure that disclosures are made on time if penalties are to be avoided.  

Please note this article first featured in the Business Post on 15 November 2020 and was re-published kindly with their permission on our website

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