It was two weeks before Christmas last year that saw the legal notice 342 of 2019, being published as if by stealth. It ushered in the law concerning the Cooperation with Other Jurisdictions on Tax Matters (Amendment) Regulations.
All EU states had up to 31 December to publish the same in their respective jurisdiction. The Regulations brought about several changes, mainly as regards the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. In terms of the Regulations, intermediaries are required to file information within their knowledge, possession or control on reportable cross-border arrangements to the Malta Commissioner for Revenue. Failing to report information or failing to report complete and accurate information will result in penalties of €200 plus €100 per day of default, up to €20,000. A penalty of €2,500 will also apply for failing to maintain documentation and information for a minimum period of five years. There is more joy since it imposes a penalty of €1,000 plus €100 per day of default, up to €30,000 for failing to comply with a request for information by the Commissioner.
Essentially, this Directive stipulates the obligation to report an arrangement by the taxpayer but this only applies if there is no intermediary or where the intermediary is a non-EU intermediary or where the taxpayer is notified by the intermediary that it has the right to a waiver due to legal professional privilege. Thus, the Maltese legislation exempts intermediaries from the obligation to report where the reporting of such information would constitute a criminal offence by virtue of disclosing professional secrets confided in him/her by reason of his/her calling, profession or office. Who are intermediaries? These include advocates, notaries, legal procurators, accountants, auditors, employees, and officers of financial and credit institutions, trustees, officers of nominee companies or licensed nominees, licensed investment service providers, and licensed stockbrokers.
The final Maltese legislation, however, requires an intermediary who is exempt from reporting to inform within seven working days any other intermediary or, if there is no such intermediary, the relevant taxpayer of their reporting obligations in Malta and to provide the Commissioner for Revenue with an annual update containing a list of the said reportable cross-border arrangements in a form which is yet to be determined by the Commissioner. There are just eight weeks until 1 July when DAC6 (i.e. the sixth Directive on Administrative Co-operation in the field of taxation) and time is pressing.
It comes as no surprise that a number of lobby groups have pleaded with Antonello Argenziano (responsive for taxation within EU) to consider postponement of the start date. They blame disruption due to the COVID-19 and the fact that many member states (including Malta) have not yet issued guidelines. In fact, it is worth noting that the deadline for transposition of the directive into national law, 1 January, was missed by seven of the then 28 member states, and as of early March, Greece had still not even published the draft legislation. Luxembourg was also one of the laggards, even though the government placed a draft Bill before the Chamber of Deputies on 8 August 2019. One must appreciate that the directive requires a number of preparations since it is retroactive. Typically, one notes that there is a big rush to comply with the targets of the legislation by intermediaries, who can be individuals or companies.
As of 1 July (the date of the disclosure), they’ll have less than two months left to complete preparation of two years’ worth of retrospective reporting on transactions. The directive will require compulsory reporting by EU intermediaries to their domestic tax authority of cross-border transactions or arrangements involving one or more EU member states that exhibit so-called hallmarks of aggressive tax avoidance strategies.
DAC6, in fact, imposes mandatory disclosure requirements for certain arrangements with an EU cross-border element where the arrangements fall within certain “hallmarks” mentioned in the directive and in certain instances where the main or expected benefit of the arrangement is a tax advantage. There will have to be a mandatory automatic exchange of information on such reportable cross-border schemes via the Common Communication Network which will be set up by the EU. These hallmarks invariably include confidentiality agreements regarding tax advantages, intermediary fees contingent on tax benefits, or standardised documentation or structures that are tailored to a participant’s individual circumstances. Examples of other hallmarks that may indicate aggressive tax avoidance include buying of loss-making entities to reduce tax liability, the conversion of income to capital, gifts or other types of revenue taxable at a lower rate, round-trip transactions and deductible cross-border payments involving no- or low-tax jurisdictions or that benefit from other preferential regimes. The legislation is vast as it also highlights double tax deductions or relief, transactions that sidestep exchange of information and beneficial ownership reporting obligations, and transfer pricing involving hard-to-value intangible assets or transactions that have the effect of lowering taxable profit in the future.
It is understandable that as unpaid gatekeepers, we sympathise with intermediaries who are now faced with the need to seek specialist expertise to track variations in the law from country to country, as well as the potentially large number of retrospective transactions or arrangements that must be reviewed – all in a short time! It is a no brainer that clients won’t thank them (or accept to pay their fees) for over-reporting that could prompt tax authorities to pick over the details of what could end up to be blameless transactions. Many intermediaries are likely to seek external help in meeting the challenge. As can be expected it may require multi-jurisdictional support that brings an understanding of local requirements, provided by experts with well-established processes and operational functions to help intermediaries avoid the risk of penalties. Ideally, it’ll involve the use of proven technology to speed what may be a substantial administrative burden.
As stated earlier, a number of influential lobby groups have requested a postponement of the directive owing to the impact of the COVID-19 pandemic. One such group is CFE Tax Advisers Europe and its member organisations. They have written to the Commission with a view to discuss these issues as well as seek the consensus of other relevant stakeholders. CFE Tax Advisors Europe would welcome any means of having a dialogue and opportunities to contribute to the better and effective application of the EU law. This group is a Brussels-based association representing European tax advisers.
In conclusion, one hopes that in a spirit of proportionality and good sense, the Commission will concede to defer the DAC6 obligations until the global economy recovers from the pangs of the pandemic.