The EU and tax avoidance
Is there a panacea in the new disclosure regime?
The EU Commission has been busy publishing tax proposals recently. One got to directive level meaning that it must be enacted into Irish law. It relates mainly to transactions advised upon by “tax intermediaries” being tax advisers, accountants, lawyers etc. However, it goes way beyond that mes amis because it requires the adviser (or the taxpayer) to give the tax authorities significant information on taxpayer transactions.
This is primarily anti-avoidance law so all stick with no carrot. Ireland is good at dealing with avoidance issues e.g. the EU’s recently agreed Anti-Tax Avoidance Directive wants EU countries to bring about a General Anti-Avoidance Rule (GAAR); we’ve had one for almost 30 years. Now the EU wants to enact the above disclosure directive and we’ve had something similar since 2010.
The new directive says that if an intermediary advises on a transaction with certain tax attributes and Ts & Cs apply then that intermediary has to forward details of that transaction and the taxpayers affected (humans and corporates alike) to the tax authorities. However, it’s not always the tax advisers’ responsibility. Some advisers have legal professional privilege making it the taxpayers’ reporting problem. Some taxpayers may have used their in house tax teams making it the taxpayers’ reporting problem there also. Reporting doesn’t necessarily mean the transaction is unacceptable tax-wise; rather the authorities want to know about it and there are costs for getting the disclosure wrong.
The directive allows each country to impose penalties for non-compliance. It leaves that up to the Member States to come up with their own suitable punishment although the penalties should be “effective, proportionate and dissuasive”: The guillotine may not be proportionate although it would meet the other two requirements! Our penalties where Ts & Cs apply can comprise €500 per day of non-compliance. Doing the maths if that noncompliance period was to run for say a year then the penalties could amount to the cost of your average supercar (i.e. one which can do 0-100kph, in 4-ish seconds).
Our disclosure regime and the EU’s version differ in that their one deals with cross border tax advantages whereas ours looked only domestically i.e. we looked after our Exchequer and now we may have to look after other countries as well; multiple backs get scratched here.
The OECD’s Base Erosion and Profit Shifting (BEPS) initiative suggested something similar but we now have an EU written script which has to be effective by 2020. Ok that sounds some time away but 2020 marks the start of reporting but the stuff to be reported on starts from summer 2018. That means that transactions undertaken shortly may have to be reported. All we’ve seen is the script for the law but scripts get amended and scenes are edited before the final opus ends up on the silver screen. Ok this script is fairly detailed!
And this applies across Europe. Say an accountant in an EU country advises on a transaction which affects an Irish taxpayer. It’s possible, unlike in Ireland, that the accountant could have legal privilege in that country preventing him from disclosing the transaction there so the taxpayer may have to report the transaction to their tax authorities.
The idea behind this directive is to give authorities a heads up on certain transactions which could then be legislated against by the various Member States if necessary. Remember Ireland already has a GAAR which says that an Irish tax advantage arising from a tax avoidance transaction and which is not caught by any other law may be removed. A journalist friend of mine referred to the GAAR as the tax joker in the pack and you can see where he was coming from so we’re ahead of our competitors in some respects.
The directive operates by saying that a transaction whose main, or one of its main benefits, is tax avoidance and which complies with certain “hallmarks” has to be reported to the authorities where the transaction was designed. One example of a hallmark is the parties would rather the transaction be kept confidential from the tax authorities or indeed other advisers.
Our current law operates similarly but the directive goes further by ignoring the main benefit test in some cases. There the directive says that if you took a particular action then you have to inform the tax authorities accordingly irrespective of your intention for engaging in the transaction. Therefore tax avoidance mightn’t even have entered the taxpayer’s head but it still must be reported, let that sink in for a second.
One example includes an arrangement for transfers of assets where there is a material difference in the amount treated as payable for the assets in the jurisdictions involved. This would mean that cross border transfers of assets would need to be reviewed to determine their values are similar in the respective countries or face reporting.
Ireland has rules for transfers of assets between connected parties (e.g. between companies in certain corporate groups or between human relatives) such that they will be regarded as being transferred for market value and the capital taxes can apply to any gift element. When the connected party rule was brought about for Capital Gains Tax in 1975 the then Minister for Finance noted the absence of a main purpose test and said that “I fear we must, in the words of St. Paul, see the innocent suffer for the guilty” and it would appear the EU is applying the same logic.
Some years ago following the OECD’s launch of its Study on the Role of Tax Intermediaries, a former Revenue Commissioners’ Chairman said “Intermediaries in Ireland would be nervous if I gave them unstinting praise – although generally they deserve it”. Modesty prevents me from commenting further. That said, although affecting advisers this directive also affects taxpayers directly where they have to report themselves and indirectly through subsequent law changes which may be subsequently imposed because of this heads up system.
From this summer on, when the directive comes into force, it’s critical that taxpayers understand whether any transctions they enter into are reportable. The taxpayer may not be engaging in tax avoidance at all but some of the directive’s script is written like Tommy Lee Jones’ response to Harrison Ford’s denial of murdering Ford’s wife in “the Fugitive” (1993) movie…”I don’t care”!
Tom Maguire is a tax partner in Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 1st April, 2018.