Comments on the tax transparency rules for advisors and intermediaries

In June 21, the European Commission presented its proposal for a Directive on tax transparency rules for intermediaries, based on the Public Consultation it had launched a Public Consultation on 10 November 2016 to gather feedback on the way forward for EU action on creating disincentives for advisors and intermediaries who facilitate potentially aggressive tax planning schemes; but also after OECD/G20 Action 12 had recommended in October 2015 that countries introduce a regime for the mandatory disclosure of aggressive tax planning arrangements.

The proposal aims at targeting certain intermediaries (tax advisors, accountants, financial institutions, law firms) who actively design, promote and sell schemes with the specific aim of helping their clients to escape taxation.

The proposed directive requires any company or professional that designs or promotes a tax planning arrangement which has a crossborder element and contains any of the hallmarks set out in the proposed Directive (e.g. lawyers, accountants, tax and financial advisors, banks and consultants) to report any cross-border tax planning arrangement that they design or promote if it bears any of the features or “hallmarks” defined in the Directive. They must make this report to their tax authorities within five days of giving such an arrangement to their client.

Member States must ensure proper penalties are in place for intermediaries that fail to meet these reporting requirements.

The Member State to whom the arrangements are reported must automatically share this information with all other Member States on a quarterly basis through a centralised database. There will be a standard format for the exchange of this information, which will include details on the intermediary, the tax payer(s) involved and features of the tax scheme, amongst other information.

The Commission will have access to certain aspects of the information exchanged between Member States, so that it can monitor the implementation of the rules.

In a recent Mission of the PANA Inquiry Committee to Portugal, the Portuguese Authorities commented that their regulations on tax advisors serve the purpose of disincentive illicit behaviour. For this reason, the proposal of the European Commission is mostly welcomed.

However, a few comments should be made, following those already addressed by Fabio de Masi (Die Linke):

– First of all, the distinction between aggressive tax planning from tax planning itself is at question after all the leaks that have brought to public knowledge the way in which tax and legal advisors, as well as banks and wealth managers,  assist their clients in paying no taxes -or very low ones- globally, taking advantage of the legislation in place.

– The use of the arm’s length principle together with the separate entity criteria and the use of the residence principle over the source taxation, which have proved to be the underlying problems when tax administrations attempt to tackle tax evasion and avoidance, is not addressed at all in any of the directives proposed by the European Commission.

– Addressing the tax advisors, legal advisors and banks engaged in these practices as “intermediaries” is a way of not recognising them as a guilty partner. They should be recognized as enablers and promoters of tax evasion and tax avoidance.

The proposal of a series of Generic and specific hallmarks to test whether the arrangement has been proposed in order to obtain a tax advantage, is good. However, some of these hallmarks are quite difficult to test, for example, “An arrangement or series of arrangements which does not conform with the arm’s length principle or with the OECD transfer pricing guidelines, including the allocation of profit between different members of the same corporate group”. It is already quite difficult for tax administrations to test whether an arrangement does or does not conform with the arm’s length principle, due to the inherent contradictions of such principle, so the application of this hallmark will be almost impossible to be applied.

For such reason, the BEPS Monitoring Group had proposed a series of simpler hallmarks that include the advising, drafting, or execution of any:

  • Limited risk intercompany contractual arrangements for contract manufacturing, distribution including sales and marketing support, and other services;
  • IP transfer or license agreement coupled with a cost contribution agreement;
  • Back to back arrangements including the use of one or more intermediaries for treaty shopping, to change the character of income, etc.;
  • Hybrid instrument (an instrument structured to be treated in differing fashions by two or more jurisdictions; instrument for this purpose includes, without limitation, financial instruments and securities, licenses concerning the transfer or use of intangible property, and sales and leases involving the transfer or use of tangible property);
  • Hybrid entity;
  • Total return swaps and other derivatives that avoid withholding taxes;
  • Internal group financial structure having a debt to equity ratio in excess of [__] to 1;
  • Internal group financial structure where interest-bearing intercompany obligations are in excess of total debt of group members to third-parties;
  • Change of tax residency of any existing organization to residency in another jurisdiction or to a status of residence nowhere or the establishment of any new organization resident nowhere;
  • Determination that any organization has no permanent establishment in a country from which it earns revenues;
  • Structures involving significant activities conducted by related parties that are the value drivers for the profits earned within a group member subject to zero or low-taxation (as occurs in many value-chain structures);
  • Structures involving support activities conducted within an EU country that benefits group members tax resident outside that country, but where that non-resident claims to have no permanent establishment within the particular EU country;
  • Structures involving the claiming by more than one person of any deduction or any credit (including foreign tax credits);
  • Structures involving deductible payments made to members of the same group that are not resident for tax purposes in any jurisdiction or that are resident in a jurisdiction that imposes little or no tax on income; and
  • Structures involving the transfer of losses amongst group members.

On the other hand, the proposal does not address the problem of the incompatible mix between tax advisor and audit services; as well as the fact that tax advisors, such as the Big 4 (but not limited to the Big 4) work as a network of “independent” advisors using the same brand, administrative control and having the same clients; on which GUE/NGL has recently published a study on the Big 4s by Richard Murphy and Saila Stausholm. The study concludes with a series of recommendations, that should be considered, as otherwise this proposal will be insufficient to tackle the problem of the abusive practices of promoters and enablers of tax avoidance and tax evasion:

1) In due course, and making provision for a transitional period during which change can take place, all audit firms should be required to be entirely separate from those selling any other service.

2) Despite the fact that the legal form of many of the world’s largest accountancy practices allows them to claim under existing regulations that they are a network of independent entities without legal commitment to each other, this should be ignored for regulatory purposes. The largest EU-based entity within that network would then be deemed to be the parent entity for these purposes unless another member accepted that obligation. That parent entity would then be required to file consolidated accounts for the worldwide organisation of which it was a member on public record. Failure to do so would result in a denial of licences to provide audit and taxation services throughout the EU.

3) Any network of professional services firms impacted by these recommendations should be required to apply for a single licence to provide audit and taxation services of any sort throughout the EU member states. The implication of this recommendation with regard to tax is that all abusive tax schemes promoted by the firm that impact on the tax revenues of any EU member state should be reported whether sold by a network member within or outside the EU.

When granting that licence the regulator tasked with oversight for this purpose should be allowed to take into consideration, and make enquiries about, the activities of that network wherever they occur in the world.

4) The professional networks subject to these arrangements should be required to file full country-by-country reports, adapted to meet the particular needs of this sector, on public record that make clear:

  • Who these firms are;
  • Where they are;
  • How they are managed;
  • Who they are managed by;
  • Where the balance of economic significance lies within these entities;
  • The scale of their tax-haven activities;
  • What resources these firms have available to manage their own risk.

In any case, we will have to wait and see how this discussion continues, and it will not be until January 2019 that these requirements will enter into force .