My house, my rules

New Mandatory Disclosure Rules (MDR) come into effect in the European Union (EU) on 1 July 2020 for cross-border arrangements that concern at least one EU member state. These will have a far-reaching impact in the Middle East.

On 13 March 2018, European and Fiscal Affairs Council (ECOFIN), the policy-setting body of the EU, reached a consensus among its member states to strengthen tax transparency and fight against aggressive tax planning.

That result was EU Council Directive 2019/822 (DAC6) that laid down rules for the mandatory disclosure, to the tax authorities, of cross-border arrangements with potential tax motivations. The rules apply to all kinds of taxes with the exception of excise duties customs, social security contributions and Value Added Tax.

 The stated objective of introducing DAC6 is to provide EU member states with information that enables them to promptly react against harmful tax practices and close loopholes, undertake adequate risk assessments and carry out targeted tax audits where necessary. Reporting obligations fall on intermediaries involved in reportable arrangements in the first instance. Where there is no intermediary, the reporting obligation falls to the relevant taxpayers.

Timeline

DAC6 was formally adopted by ECOFIN on 25 May 2018 and applies to all cross-border arrangements implemented from 25 June 2018 onwards. 

EU member states are introducing national laws to transpose the provision of DAC6 into their local regulations taking effect from 1 July 2020. Once the regulations become effective intermediaries (or relevant taxpayers) will be required to disclose any reportable cross-border arrangements to their local tax authorities within 30 days of:

a) the date on which the arrangement is made available for implementation; or

b) the day the first step of the arrangement is implemented.

Any reportable cross-border arrangements implemented between 25 June 2018 and 30 June 2020 are reportable by 31 August 2020. Reporting by intermediaries (or relevant taxpayer) will be followed by cross-border exchange of information between the relevant tax authorities.

Intermediary vs. relevant taxpayer

Under DAC6, an intermediary is defined as a party that is involved in designing, advising, marketing or organizing the implementation of a reportable cross-border arrangement, with some connection to the EU (such as a tax residence, place of incorporation, or having a permanent establishment).
Given the broad scope of the definition, a large number of persons/entities can be considered as intermediaries, such as lawyers, accountants, financial advisors, banks, and other service providers.

A relevant taxpayer is a person for whom a reportable cross-border arrangement is made available and who has either EU tax residence or permanent establishment or receives income from an EU member state.

What is reportable?

DAC6 requires disclosure to tax authorities of cross-border arrangements affecting at least one EU member state that fall within one of a number of hallmarks (feature that are broadly seen as resulting in obtaining a tax advantage). While some hallmarks only apply to cross-border arrangements where obtaining a tax advantage was one of the main benefits, other hallmarks do not require the existence of a main benefit of obtaining a tax advantage. 

What needs to be reported?

Some of the key information that intermediaries or relevant taxpayers need to disclose are the name and tax residence of the taxpayer along with a summary of reportable cross-border arrangement, monetary value, details of applicable hallmarks and the effective date of the arrangement.

The penalties for non-compliance depend on each EU member state.

What does this mean for the Middle East?

As some (if not all) of the Middle East countries such as Qatar, Oman, the UAE and Saudi Arabia have become Inclusive Framework members of the Organization for Economic Cooperation and Development (OECD), they have implemented the four minimum standards under the inital OECD Base Erosion Profit Shifting (BEPS) project in relation to Action 5 (Harmful Tax Practices); Action 6 (Tax Treaty Abuse); Action 13 (Country by Country Reporting) and Action 14 (Mutual Agreement Procedure). (Editor’s note: See article on Economic Substance, p. 26)

Along the same lines, one of the BEPS projects is Action 12 (not a minimum standard) that requires taxpayers to disclose their aggresive tax planning arrangements to the tax authorities. One can argue that the introduction of DAC6 is also inspired by this BEPS Action 12 to provide disincentives for intermediaries who assist in tax evasion or avoidance schemes.

In the first instance, it is easy to assume that taxpayers based in the region will not be impacted by the new DAC6 rules since this is related to Europe but that is not the case. It is important to note that DAC6 will also impact Middle East businesses that have permanent establishment (PE) in the EU or have EU subsidiaries. For any transactions into or within the EU, advisors/intermediaries to the taxpayers have to keep in mind the MDR reporting requirements in the coming year. Not only that, given that all reportable cross-border arrangements from 25 June 2018 are covered, intermediaries/taxpayers will have to keep track of all those relevant transactions as well.

Key takeways for ME-based taxpayers

As each local EU Member State is required to transpose the provisions of DAC6 into local regulations, Middle East taxpayers and their intermediaries must keep an eye on various rules and regulations for each country and how this may impact their cross-boder arrangements with the EU. 

by Abi Man Joshi, Tax Principal, Deloitte Qatar, Martin Walker, Tax Director &
Head of Securities Taxes, Deloitte UK and Jallu Fehar, Associate Tax Director,
Deloitte UK