The European Union’s Mandatory Disclosure Regime · The European Union’s Mandatory Disclosure...

The EuropeanUnion’s MandatoryDisclosure Regime

A roundtablediscussion

June 2018

2 The European Union’s Mandatory Disclosure Regime

The European Union’sMandatory DisclosureRegime

On 25 May 2018, the Council of the European Unionformally adopted the Directive amendingDirective 2011/16/EU with respect to mandatoryautomatic exchange of information in the field oftaxation in relation to reportable cross-borderarrangements (the Directive). The content of theadopted Directive corresponds to that agreed by theEconomic and Financial Affairs Council of theEuropean Union (ECOFIN) on 13 March 2018.

The Directive, which will now take effect on 25 June20181, will require “intermediaries” such as taxadvisors, accountants and lawyers that designand/or promote tax planning arrangements toreport transactions and arrangements that areconsidered by the EU to be potentially aggressive.

If there are no intermediaries that can report, theobligation will shift to the taxpayers.

Given the breadth of the transactions andarrangements covered, relevant reportingobligations will very likely result for both companiesheadquartered in Europe and for non-Europeancompanies with activities in Europe. Determining ifthere is a reportable cross-border arrangementraises complex technical and procedural issues formultinational companies and their advisors.

Our roundtable panel discuss the new provisionsand how they may impact your business, including:

• Background and timeline• Details of the mandatory disclosure

requirements, including the purpose of thereporting, what arrangements are reportable,when reporting must be made and what happenswith reported information

• Implications of reporting/failure to report• The need for tracking and reporting systems and

procedures

The roundtable discussion occurred in April 2018,prior to formal adoption of the Directive.

Wel

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eStream the on-demand archive ofour 25 April 2018webcast as our paneldiscusses the newprovisions and howthey may impactyour business:

go.ey.com/2vPRLjj

1. EU publishes Directive on new mandatory transparency rules forintermediaries and taxpayers, EY Global Tax Alert, 5 June 2018.https://www.ey.com/gl/en/services/tax/international-tax/alert--eu-publishes-directive-on-new-mandatory-transparency-rules-for-intermediaries-and-taxpayers

3The European Union’s Mandatory Disclosure Regime

Jano BustosJano Bustos leads the BEPS desk in the EY Global Desk Network in New York.Before joining EY, Jano worked at the Spanish Ministry of Finance where,among other roles, he was a delegate to several of the OECD working partiesand was part of the group of ad hoc tax experts to the United Nations.

Roundtable participants

Stephanie LambStephanie is one of the leaders of our Financial Services practice.

Tom RalphTom is a US native, but resident in Munich, Germany, where he is a memberof EY’s United States transfer pricing desk.


Roundtable participants

Rienk KamphuisRienk is one of the leaders of our Tax Technology and Transformationpractice.

Moderator: Marlies de RuiterMarlies de Ruiter is the EY Global International Tax Services Policy Leader,based in the Netherlands. Marlies has broad experience with internationaltax policy, and specifically with BEPS, and was previously the Head of the TaxTreaty, Transfer Pricing and Financial Transactions Division of the OECD’sCentre for Tax Policy and Administration. Under her leadership, the OECDdeveloped 7 of the 15 BEPS actions, including the actions on tax treaties andtransfer pricing.


The European Union’s Mandatory Disclosure Regime:rationale for the new rules

Marlies de Ruiter: On March 13, the EU Council reachedagreement that so called tax intermediaries – which in theirpress release they summarized as tax advisors, accountantsand lawyers – need to report, and again I use the words thatthe EU uses in its press release “schemes that are consideredpotentially aggressive.” The agreement of the Council was ona draft Directive that itself would amend EU Directive2011/16/EU which involves administrative cooperation in thefield of taxation.

As we will cover in our discussion today, a more thoroughread of the Directive, however, makes it clear that the termintermediaries is quite broad, potentially including banks andtrusts. This obligation to report will shift to taxpayersthemselves if there is no (EU) intermediary that is obliged toreport. Also, we will see that the net to catch what isconsidered aggressive cross-border tax planning is cast ratherwide. Moreover, once the report has been made, it willautomatically be shared between all tax authorities in the EU.

The broad scope is consistent with the aim of the Directive,which is to tackle what the EU sees as aggressive cross-bordertax planning. The Directive achieves that in two differentways: first, by providing tax authorities with informationabout the types of tax arrangements that are being used, butalso by trying to create a behavioral change via a deterrentfor taxpayers to engage in behaviors that could draw theattention of the tax authorities once reported. Of course, thefirst question to ask with new rules, in particular rules likethese which will impact compliance processes at the core, iswhen they will start to have an impact.

Stephanie, even though reporting isn’t required until 2020 –my understanding is that the application of the rules isimminent. Is that right?

Stephanie Lamb: That’s right, yes; because the Directive asksEU Member States to give retrospective effect to the ruleswhen they implement them. Let me explain what that means;On 13 March 2018, political agreement was reached on thetext of the Directive, and the Directive was adopted by theCouncil of the European Union on 25 May 2018. It enters intoeffect 20 days after its official publication, which means on25 June 2018. Member States will translate the Directive intonational legislation before the end of 2019, and the legislationwill have to take effect as of July 2020. However, as I saidthere is the obligation to create a retrospective effect for anyreportable cross-border arrangements of which the first stepwas implemented after entry into force of the Directive andbefore July 1st 2020.

Reporting will have to take place before 31 August 2020 and,after that, the first exchanges of this information will takeplace in October 2020. Given the steps that must be takenbetween not now and its official adoption, we thereforeexpect that the scope of this Directive will include reportablecross-border arrangements implemented as of June or Julythis year.


Once it is established that there is a reportable cross-borderarrangement, then the next thing to establish is who needsto report — an intermediary or, if there is no intermediarythat is obliged to report, the taxpayer.

Marlies: So it’s going to be crucially important to be able toidentify these reportable cross-border arrangements as ofJuly or so this year and penalties will apply to situations ofnon-compliance. In order to understand what needs to bereported and who needs to report, let’s first take a look at theoverview of the process.

As you see, the whole process starts from the indication thatsomething may be changing in the tax environment, or theentrepreneurial or even personal environment of a person, ifthis may have tax consequences. This person may be anindividual or an entity. Such a change may be a planningactivity that is, for example, needed because of new marketdevelopments, a restructuring of activities or reshuffling ofentities or the creation of new contracts and transactions.From there, the first question is whether the taxes that maybe implied are in scope of the Directive. If they are, thenwhether the change leads to a cross-border arrangementneeds to be assessed and, if it does, whether thatarrangement is reportable because it meets one or more ofthe predefined hallmarks. Once it is established that there is areportable cross-border arrangement, then the next thing toestablish is who needs to report — an intermediary or, if thereis no intermediary that is obliged to report, the taxpayer.Finally when it is established who needs to report, then thenext questions are what information needs to be reportedwhen and where.

Moving back to the first step of the process, the first questionto ask is what taxes are covered. Stephanie, can you shedsome light on that?

Stephanie: The existing Directive, into which the new rulesare being added, is one that relates to all taxes, butspecifically excludes many indirect taxes. So, income tax,corporate tax, capital gains tax, registration duties, localtaxes, real estate taxes, and wealth or inheritance taxes areall within the scope; however, indirect taxes such as VAT,customs and excise duties are not. Also social securitycontributions and fees for certificates, etc. and dues of acontractual nature are excluded.

Marlies: So that limits the application more or less to directtaxes, which is also confirmed by the press releaseaccompanying the new Directive. The next question iswhether the change may lead to a cross-border arrangement.Tom, what is a cross-border arrangement, according to theDirective?

Page 13

What is a cross-border arrangement?

? An arrangement may be any transaction,series of transactions, structure orscheme. An arrangement may involvemore than one step or part.

? Cross-border arrangements are thosethat concern either more than one MS oran MS and a third country.

? Where at least one of the followingconditions are met:? Participants are tax resident in two or more

jurisdictions.? One or more participants are dual residents.? Arrangements are part of the business of a

permanent establishment (PE).? An activity is carried on in another

jurisdiction without tax presence in thatjurisdiction.

? It affects the automatic exchange ofinformation or the identification of beneficialownership.

EU mandatory disclosure regime

Planning? Restructuring? Reshuffling? New? Changes?

Covered taxes?

Cross-border arrangement?

Reportable?

Reporting intermediary?

Reporting taxpayer?

What information? Where to? When?

Yes

Yes

Yes

Yes

Yes

No

Yes

ü

ü

ü

Tom Ralph: First, I would like to note that many of theconcepts that we will be diving into now, even when furtherdefined, are vague and require interpretation. Theinterpretation by the governments that will be needed oncegovernments introduce these rules into their domesticlegislation is not yet available, and will likely only be producedsometime next year. Also, countries may deviate from theDirective and be stricter, for example, including domesticarrangements in their requirements. But at this moment wecan only work with information we have, and as mentioned,due to the retrospective effect that is required, we will needto start collecting the cross-border reportable arrangementswhich are subject to the Directive as of the coming June orJuly.

The first relevant question on cross-border arrangements iswhat exactly is an arrangement? An arrangement can consistof more than one step or part, according to the Directive. Nofurther explanation is given, however. Looking at theaccompanying publications, but also at the way that EUcountries that have already implemented mandatorydisclosure rules have interpreted the term, such as the UK, anarrangement may be anything from a transaction to a seriesof transactions, a structure or a scheme.


It could actually mean that if a sale of goods is consideredan activity, or traveling to an EU country for businesspurposes is considered an activity, that such activities are across-border arrangement and may be caught as areportable arrangement if one of the hallmarks is met.

Such an arrangement is regarded as a cross-borderarrangement when it concerns either more than one of the EUMember States or a Member State and a third country. Sotransactions between Australia and China are out of scope. Tobe of concern to one or more Member State, one of theconditions on the image on page 6 needs to be met. Anyarrangement that involves participants from more than onecountry will be captured. And, as you see, these participantsdo not necessarily have to be associated enterprises. So thatcondition is quite easily met in a cross-border situation. Theother conditions are more specific, and require either aparticipant that is a dual resident or has a permanentestablishment, or — and I find this quite far reaching —concerns a situation where a participant carries on an activityin another jurisdiction without being tax resident or creating apermanent establishment.

This last one is extremely wide in scope. It could actuallymean that if a sale of goods is considered an activity, ortraveling to an EU country for business purposes is consideredan activity, that such activities are a cross-borderarrangement and may be caught as a reportable arrangementif one of the hallmarks is met. The key question then, iswhether and which hallmarks may be met in these situations.Also, arrangements that may have an impact on automaticexchange of information or the identification of beneficialownership are captured.

Marlies: Tom, that means that the definition of cross-borderarrangement may capture many situations, such as forexample, a professor traveling to another country to give alecture, or an employee of a small or medium-sized enterprisetraveling to another EU country to explore the possibility inthat market by participating in an industry fair. The key willthen be whether this is a reportable cross-borderarrangement. What makes such a cross-border arrangementreportable?

Tom: Cross-border arrangements are only subject to reportingwhen they meet one of the hallmarks listed in the Directive.These hallmarks reflect characteristics of arrangements thatare deemed to create potential risks of tax avoidance. Thesehallmarks are not carved in stone, and they may change overtime; indeed, they are scheduled to be reviewed every twoyears. When looking at the hallmarks, it is also important torecognize that some of them are subject to a gatewaycriterion, known as the main benefits test, and some are not.

The main benefits test resembles the main purpose test thatyou may know from your country’s general anti-avoidancerules, or from the principal purpose test that the OECD hasdeveloped. However, as it only relates to the benefit createdby the “tax advantage” and not to the purpose behind thearrangement, it also seems to be intended to be broader thanthe main purpose test. Besides that, it seems that it isintended to be more objective, looking at the weighting of theexpected tax advantage compared to other expectedadvantages. A problem here is that it is not defined what thetax advantage is or when a tax advantage is considered to bederived. What is the starting point or the counterfactual fromwhere the assessment begins? The only sliver of explanationis given by the wording that is added for the category Challmarks, which are subject to the main benefit test. Here, itis indicated that taxation at a zero or almost zero corporatetax rate, the applicability of a full exemption or taxation in thecontext of a preferential regime by themselves are notsufficient to conclude there is a main benefit. This implies thata counterfactual first needs to be defined before it can beassessed whether a tax benefit was derived. Thiscounterfactual could, for example, be the arrangement, orseries of transactions, as it would likely be constructed if notax would be imposed. This would for example mean that acommercial activity of a company in a zero tax country byitself would not lead to reporting.


Such [confidentiality] clauses are quite commonly posed by intermediariesgiving tax advice. EY changed its approach globally following the introduction ofmandatory disclosure rules in the US and no longer poses such conditions. Theintroduction of mandatory disclosure rules in Europe may have similar effectson the engagement conditions on tax advice in the EU.

Marlies: Thanks, Tom. So the hallmarks play an important rolein the determination of whether a cross-border arrangementwill be reportable. Will the professor or the SME that wementioned before indeed have to report their arrangements?

The thumbnail above reflects all the hallmarks. As you see,the hallmarks illustrate how broad the scope is that the EUhas identified. The first box relates to hallmarks for which themain purpose test functions as a gateway criterion. Thehallmarks indicated in the second box will trigger a reportingrequirement by themselves. As it takes too much time todiscuss all hallmarks in detail, we will discuss some now, butnot all. The image gives you an indication of the manyelements that are captured.

The confidentiality hallmark is something that taxpayers maywant to pay special attention to. Such clauses are quitecommonly posed by intermediaries giving tax advice. EYchanged its approach globally following the introduction ofmandatory disclosure rules in the US and does not pose suchconditions anymore. The introduction of mandatory disclosurerules in Europe may have similar effects on the engagementconditions on tax advice in the EU.

Jano, the confidentiality hallmark looks at the formalagreement between the client and the intermediary. Manyothers look at triggers that are closely connected to theamount of tax to be paid. Can you give a couple of examples?

Jano Bustos: Thanks, Marlies. Let me briefly describe some ofthe so called “specific hallmarks related to cross-bordertransactions” included in letter C. paragraph 1 of the Annex ofthe Directive that we mentioned before. As we said, some ofthese hallmarks require the “main benefit test” to apply, whileothers don’t.

A common element to these hallmarks is that they all relate toarrangements that involve deductible payments betweenassociated enterprises. Therefore, not all cross-borderpayments are included, but only the ones that are deductible.

Also, these payments need to be made between associatedparties as defined in the Directive. The payments don’t needto be between EU Member States, and payments involvingthird countries are also covered.

Once we have a payment that meets these conditions,basically being a deductible payment between related parties,the hallmark then looks into the tax consequences of thepayment for the recipient. Here, the Directive is clearlylooking into situations where a deduction or non- or low-inclusion situation may occur for all or part of the incomeassociated to such deductible payment.

The first case we have is when the recipient is not resident fortax purposes in any jurisdiction. That could occur, forexample, when transparent entities are involved in atransaction. This hallmark does not require the main benefittest to be met, so the mere fact of a deductible payment beingpaid to such transparent entities would trigger the reportingobligation.

Two other hallmarks look into the characteristics of thejurisdiction where the recipient of the payment is established:

• First, we have payments to jurisdictions that do not imposeany corporate tax or imposes corporate rate at a rate ofzero or almost zero. This hallmark seems to refer to thestatutory rate of that jurisdiction and not the effective rateto make this determination. In this case, the main benefittest needs to be met.

• Second is a hallmark that looks into the jurisdiction wherethe recipient is resident is the one that refers to non-cooperative jurisdictions included in the OECD or EU lists,the so-called black lists. The EU published its list last year.In this case, there is no requirement to also meet the mainbenefit test and the hallmark will apply automatically.

The other two hallmarks included in letter C.1 of the annex donot refer to specific tax features of the jurisdiction of therecipient, but rather the taxation of the payment itself. Inboth cases, the main benefit test needs to be met. It isimportant to note that the Directive makes clear that, in thecontext of the application of these specific hallmarks, thepresence of the conditions set out in them — which in this caseis the low taxation in the hands of the recipient — cannot alonebe a reason for concluding that an arrangement satisfies themain benefit test.


The use of the word “undermine” seems to introduce an element of intent andsubjectivity, which will likely require guidance in order to understand where thebar is set and enable the filtering of arrangements which are purely commercial(i.e., they might result in no CRS reporting but that is simply the outcome of acommercial arrangement rather than something that is used for the purpose ofavoiding CRS reporting for improper purposes).

The first case would is that of payments benefiting from a fullexemption in the recipients’ hands. The other case would bethat of payments benefiting from a “preferential tax regime.”Any preferential regime (such a regime does not necessarilyneed to be harmful) would be covered. Therefore, even thosetax regimes (such as patent boxes) that meet therecommendations of the OECD under the BEPS project will fallwithin the scope of the hallmark. In order for a regime to beconsidered preferential, it must offer some form of taxpreference in comparison with the general principles oftaxation in the relevant country.

Marlies: Let’s move to the area of financial services andbeneficial ownership. Stephanie, can you tell us somethingabout the hallmarks on exchange of financial accountinformation and unclear beneficial ownership structures?

Stephanie: These particular hallmarks are targeted at“arrangements” that may have the effect of underminingreporting obligations under the common reporting standard(CRS)

On the face of it, this is a very broad requirement, as it doesnot necessarily need to have had the effect but simply “may”have the effect of undermining the CRS. The use of the word“undermine” seems to introduce an element of intent andsubjectivity, which will likely require guidance in order tounderstand where the bar is set and enable the filtering ofarrangements which are purely commercial (i.e., they mightresult in no CRS reporting but that is simply the outcome of acommercial arrangement rather than something that is usedfor the purpose of avoiding CRS reporting for improperpurposes).

The introduction to the proposed changes to the Directivemakes reference to the work undertaken by the OECD on theModel Mandatory Disclosure Rules for Addressing CRSAvoidance Arrangements and Opaque Structures (“MMDR”)and cites the MMDR and its Commentary as a source ofillustration and interpretation for Hallmark D.1

In terms of understanding what these rules mean for financialinstitutions, the first thing to consider is that the definition of“intermediary” is broad and not only includes personsresponsible for the design or marketing of arrangements, butalso any persons who provide services, assistance or advicerelating to the design, marketing or organization of thearrangement where they know or could reasonably beexpected to know the person was involved in such anarrangement.

That definition would not generally be expected to capturefinancial institutions when carrying out routine bankingtransactions (i.e., money transfer, custody, etc.) because thenature of the information readily available to them wouldtypically not meet the “reasonably be expected to know”standard.

Financial institutions will need to consider the services theyoffer, however, especially whether there are instances inwhich they are in possession of knowledge (using theobjective standard), which would mean they should know theirservices cause them to be an intermediary with an obligationto disclose.

Financial institutions may also need to consider undertakingrisk assessments to identify areas of their business wheresuch arrangements might exist.


The US offers taxpayers the ability to depart from the arm’s-length standard andcharge only costs for certain services that are generally administrative or low value innature. The use of the services cost method is attracting more attention lately becausethe use of it may help mitigate the impact of the new base erosion anti-abuse Tax(BEAT) measure that was introduced a few months ago in the US.

The D2 hallmark is largely mechanical and is aimed at thereporting of non-transparent legal or beneficial ownershipchains. It applies to any arrangements that meet certainconditions, regardless of the purpose or effect of thosearrangements. An arrangement is caught if it involves a non-transparent legal or beneficial ownership chain and also usespersons, legal arrangements or structures that meet the threeconditions reflected on the image.

The MMDR has a fuller definition of an opaque offshorestructure and an exclusion for institutional investors (meaningregulated and government investors).

The MMDR refers to the Financial Action Task Forcetransparency requirements as a test of whether a jurisdictionis sufficiently transparent.

Marlies: This moves us to the E hallmarks on transfer pricing.Tom, can you illustrate what the reporting obligations relatingto transfer pricing will be?

The US offers taxpayers the ability to depart from the arm’s-length standard and charge only costs for certain servicesthat are generally administrative or low value in nature. Theuse of the services cost method is attracting more attentionlately because the use of it may help mitigate the impact ofthe new base erosion anti-abuse tax (BEAT) measure that wasintroduced a few months ago in the US.

Presumably, related-party transactions with Brazil that usethe statutory minimum profit margins or statutory interestrates, would need to be disclosed. Similarly, transactions withUS related-parties that use the services cost method wouldalso need to be disclosed. These are just two examples oftransactions with third countries that would need to bedisclosed. Many similar unilateral safe harbors exist. Eventhough these transactions clearly pose the risk of chargingprices that are not arm’s-length, you can question whether allof these pose a relevant tax risk. Mostly safe harbors areintroduced to create simplified approaches for relativelyroutine, low transfer pricing risk, transactions. It is a pity thatnow the all transactions falling within the scope of thishallmark are potentially painted as tax avoidance practices, inparticular at a time when simplification is so badly needed.

Tom: The first specific hallmark related to transfer pricinginvolves the use of unilateral safe harbor rules. Somecountries, such as Brazil and the US (at least for someservices transactions) have transfer pricing rules that do notfollow OECD norms and instead compensate related parties byusing specified fixed margins depending on the industry. Forexample, Brazil generally requires the use of the resale pricemethod, with respect to the importation of goods, services orrights. Under this method, the Brazilian entity must earnspecified minimum statutory gross profit margins rangingfrom 20% to 40% depending on the company's industry.

Similarly for exported products or services, the Brazilianentity must earn a minimum of a specified, fixed statutoryprofit margin. Finally, Brazil limits the deductions of interestexpense that Brazilian entities pay interest to foreign-relatedparties by reference to LIBOR plus an annual spread.

Tom: Taxpayers will also need to disclose informationregarding transactions involving intangibles that are hard-to-value — perhaps because of the lack of comparables or due todifficulties in predicting at the time of transfer the level ofultimate success of the intangible). Although the transfer ofthe IP may be made for non tax reasons, the new mandatorydisclosure rules require these types of transactions to bedisclosed. How will the governments use this information? Willthey look at all these kinds of transactions as nefarious? Timewill tell, but it is advisable to ensure that you have a robustfunctional analysis, economic analysis, and documentation forall reportable transactions.


Transactions involving restructurings that result in significant profit shiftsfollowing the transfer of functions, risks and/or assets between jurisdictions mustalso be reported.

Transactions involving restructurings that result in significantprofit shifts following the transfer of functions, risks and/orassets between jurisdictions must also be reported. Take thesimple example of converting from a full-fledged distributorinto a “risk-less” distributor. Consider the example in which amultinational enterprise group (MNE group) holds tradenames and other similar IP in Company A and long-termsupplier contracts in Company B. After the MNE groupacquires a full-fledged distributor, the MNE group transfersthe acquired corporation’s trade name and similar IP toCompany A and the acquired corporation’s long-term suppliercontracts to Company B, consistent with its corporatestrategy for operating.

This example may seem familiar to you because it is anexample from the OECD Transfer Pricing Guidelines onRestructuring. The OECD Transfer Pricing Guidelines instructus that such a restructuring would be respected. Nonetheless,the new mandatory disclosure rules require that suchtransactions be disclosed, even if an exit tax is paid.

Again, it is unclear how governments will use the informationthey receive under the new rules, so it is critical to ensurethat the conduct of the parties is consistent with the form ofthe restructuring and that the economic analysis is strong.The new mandatory disclosure rules imply that taxpayersmust be even more proactive in performing functional andeconomic analyses and documenting their transactions.

Marlies: For many of these transactions, there may not evenbe an intermediary involved and we should realize that thepotential impact on taxpayers themselves may be extensive.But, it seems that the lecture by the professor and the visit tothe industry fair are not covered by the hallmarks, eventhough they were identified as cross-border arrangements.

One thing to note for completeness is that, besides individualreportable cross-border arrangements, intermediaries willface separate reporting obligations on marketablearrangements. The image to the left and below indicates whatmarketable arrangements are and reflects the specificinformation that must be reported every three months.

That moves us to the “Who needs to report” question. Thefirst port of call is the intermediary. Jano, who are regardedto be intermediaries and when will these intermediaries haveto report?

Jano: The primary responsibility to report arrangements thatfall within the so-called hallmarks rests with an intermediary.The definition of an intermediary in the top half of the aboveimage is somewhat broad, covering those who design, marketor knowingly provide advice in relation to a reportablearrangement. So it is certainly wide enough to cover mostsituations where an intermediary provides tax advice. Butfrom what we know at present, it should not catch situationswhere the intermediary role is solely one of tax compliance, orfinancial statement audit.

For an intermediary to have a reporting obligation, they mustalso have nexus to the EU. That means that, for example, anintermediary outside the EU will not have a reportingobligation — though if it has subcontracted part of the adviceto an EU-based intermediary, that EU-based intermediary mayhave to report. When there is no EU intermediary involved,the obligation to report will shift to the taxpayer. With that,these new rules will directly and indirectly also impact thecompanies or individuals to which the arrangements relate.


It is very important to note that there are certain situations in which thereporting obligation falls on the taxpayer. Those would, for instance, bewhere a transaction or a planning idea is developed and implemented “in-house” or an advisor is outside the EU so there is no intermediary in themeaning of the new rules.

It is very important to note that there are certain situations inwhich the reporting obligation falls on the taxpayer. Thosewould, for instance, be where a transaction or a planning ideais developed and implemented “in-house” or an advisor isoutside the EU, so there is no intermediary in the meaning ofthe new rules, or in a case where the relationship betweenadvisor and client is protected by legal professional privilege.

That might well be the case, for instance, in those countrieswhere the intermediary is a law firm, rather than anaccountancy practice. In those latter cases, though, theintermediary will still need to be able to identify arrangementsthat fall within the Directive, as the Directive requires them toinform a taxpayer of their disclosure obligations, and theintermediary will need to document in its files that it hasinformed the client.

One final word on legal professional privilege; some similarbroader concepts and obligations exist in various countries.Typically, we refer to these as professional secrecy. TheDirective is phrased quite narrowly and so it will be interestingto see what happens (and whether the reporting exemptionwill apply also to professional secrecy) when nationalgovernments put this into local law.

Marlies: Jano, a question that I have is whether a taxpayer isconsidered an intermediary or whether the term is separatelydistinguishable from the intermediary?

Jano: The taxpayer is not an “intermediary” and that’s animportant distinction. I mentioned earlier that intermediariesonly need to report if they have nexus to the EU. Where theobligation to report rests with the taxpayer, on the otherhand, that EU nexus requirement does not apply.

Marlies: So if someone in the United States – let’s say a USlaw firm – advises on a cross-EU transaction to a US taxpayerand that transaction otherwise meets all the requirements forreporting, then the US lawyer is excused, but the US taxpayerneeds to report? That can be interesting.

Jano: Yes, that is the way that the wording seems to read. Wewill need to see what the domestic legislation will look like, ofcourse. But if a US corporation does not report in thesecircumstances it seems that it will be non-compliant.

Marlies: Thanks Jano. Now that we’ve spent some time on thetriggers for reporting, let’s take a look at what information theintermediary (or the taxpayer) has to provide to the taxauthority. Rienk, can you take us through that?

Rienk: One thing you will notice straight away is that theidentity of the taxpayer is part of the required information. Sothis is not just about giving the tax authority visibility on thearrangement, but also the identity of the client involved in thearrangement.

The arrangement must be described, together with thehallmarks that are triggered. There is also a requirement toidentify the “value of the arrangement.” At this point, it is notclear what is meant by this.


Another key feature of this EU regime is that the reports areautomatically exchanged, on a quarterly basis, among theMember State governments.

Let’s turn to the timing of when these disclosures have to bemade. Essentially, there is a 30-day window from any of thetrigger dates set out on this image on page 12. Arrangementscaptured by the retrospective effect will have to be reportedbetween July 1st and August 31st 2020. These sametimeframes apply to taxpayers, where such obligation toreport sits with them. At this stage, the EU has provided nointerpretative guidance on this, or indeed on anything else inthe Directive.

Marlies: I am still not sure what is meant by “made availablefor implementation.” Does it, for example, require a detailedstep plan? I know it is perceived to be unclear, but can we turnto other interpretation sources to see whether they arehelpful. Stephanie, can, for example, the UK explanations ontheir disclosure rules be helpful?

Stephanie: The UK has had a domestic disclosure regime forsome years, and that phrase “made available” does indeedfeature in the UK rules. It is worth noting that the UK taxauthority has published substantial guidance on its regime,almost 200 pages, and we have to hope that either the EU orMember States will do likewise with this Directive, given themany uncertainties we are facing. In a UK context, “madeavailable” means that all the elements necessary for theimplementation of the scheme are in place and acommunication has been made to a client suggesting theyenter into it.

Marlies: Now we know what needs to be reported, who needsto report and when reporting needs to take place, the nextquestion is where the report needs to be filed. Jano, is thereany guidance on this question?

The image above provides a second interpretation. It gives theorder of reporting when multiple intermediaries or taxpayershave to report on the same reportable cross-borderarrangement. For taxpayers, the reporting obligation isrelatively clearly narrowed down to one taxpayer, as long asthe other taxpayers provide proof that reporting has takenplace. However, for intermediaries, the guidance is a bitambiguous. It is indicated that in principle all intermediarieshave to report. However, it is also indicated that reportingdoes not have to take place if it is proven that reporting hastaken place according to the domestic legislation of theMember State of the reporter. It is not entirely clear whetherthis only covers the situation where intermediaries are in thesame country, or also covers situations where theintermediaries are in different countries, although thatinterpretation would mean that many duplications would beprevented.

Marlies: The possibility to ensure reporting by one centralintermediary does seem efficient. Let’s look at what happenswith the information once it has been provided. Different fromindividual national mandatory disclosure regimes, theinformation reported will be exchanged on the basis of thisDirective. Tom, can you explain how that will work?

Jano: The image above gives the order of reporting if theintermediary or taxpayer needs to report in several MemberStates, for example, because it has a taxable presence inmultiple countries, such as in its country of residence and in aPE country. In principle, reporting per taxpayer or intermediarywill therefore only take place in one Member State.


It is important to note that this is not an advance ruling orclearance regime. The Directive explicitly states that justbecause a tax authority does not react to informationdisclosed, it should not be assumed that they accept thearrangements are acceptable.

Tom: Another key feature of this EU regime is that the reportsare automatically exchanged, on a quarterly basis, among theMember State governments. This exchange will start inOctober 2020. The exchange will also capture the cross-border arrangements that are captured by the retrospectiveeffect of the Directive.

It is important to note that this is not an advance ruling orclearance regime. The Directive explicitly states that justbecause a tax authority does not react to informationdisclosed, it should not be assumed that they accept thearrangements are acceptable.

Marlies: Thanks, Tom. We now have a good overview of whatthe Directive will require. Looking at the scope of thereporting obligations, it seems that intermediaries andtaxpayers can use some help in identifying, tagging, storingand tracking the reportable cross-border arrangements thatthey will have to identify as of June and July this year. Rienk,can technology help?

Marlies: The Directive also asks member states to introducepenalties. What might these look like?

Tom: The penalties have been left to national governments toset, with the Directive simply guiding governments that thepenalties should be effective, proportionate and dissuasive.Apart from penalties, of course, non-compliance will lead tosignificant reputational risk.

Rienk: Of course. Even though there are a lot of questionsabout the scope and the detailed implications, we are lookinginto developing a tool specifically for these newdevelopments. The purpose of the tool could, for instance, beto provide our clients direction on whether and whatinformation needs to be disclosed, by whom and to which taxauthority, and — if a company is using multiple intermediaries— to keep track of which information is shared by whom andwhether all required disclosures have been made.

Ideally it would have dashboards — such as, for instance, themock up that we show you here on the thumbnail above — thatinform you which intermediary is responsible for disclosure orthe company itself. Also, we would like to clearly distinguishthe hallmarks in each report so that — prior to submission —we can revisit and review the reports for insights that will nodoubt develop over the next two years as this Directive isbeing implemented.

It should also be noted that in most countries providingcontent to the tax authorities requires specialized secure datatransmission protocols. And that is not necessarily easy orcheap, as we have seen from the country-by-countryreporting.


I would like to stress the fact that this new Directive willbecome relevant for intermediaries and taxpayers as of Juneor July this year, given the retrospective effect required.

Given the complexity and increased compliance burden ofthese developments, we intend to put some serious effort intocreating a methodology that our clients can easily access andthat will help them manage their own reporting obligations, aswell as to create a level of oversight over the reportingobligations of the intermediaries that are their serviceproviders.

That brings us to the final part of the webcast. I would like toclose off with two short takeaways:

1. First, as we have seen, the rules will have a relevantimpact on the transparency environment. But it is not theonly change that will have impact on transparency. We hada webcast on this new environment in September lastyear, which you still can view. This new era oftransparency will have an important impact on thealignment of a company’s tax policy with their commercialactivities, on designing and retaining tax documentation,on communication with stakeholders and on a company’sgovernance structure.

2. And second, I would like to stress the fact that this newDirective will become relevant for intermediaries andtaxpayers as of June or July this year, given theretrospective effect required.


70%

23%

7%

1. What is your current understanding of the content and impact of theMDR Directive?

A. I have heard about it, but I do not know anything yetabout the content and the potential impact it will have

B. I have read about the Directive (alerts etc) and amlooking for more detailed information to assess whether itwill impact my organization

C. I have read the Directive itself and know it will have animpact on my organization. I am hoping to get someconfirmation of my understanding and answers to myquestions during this webcast

19%

16%

4%5%

2%

54%

2. What is your initial reaction to the MDR Directive?

A. It only comes into effect in 2020, so I don’t need to worryabout it yet

B. It only applies to intra-EU arrangements, so is of limitedapplication

C. It only affects intermediaries, so it is not my problem

D. It is only a compliance matter, so it doesn’t affect mystrategy

E. It only applies to large multinational companies, so itdoesn’t concern me as an individual or private companyshareholderF. It is wide-ranging and strategic, and potentially can affectall taxpayers with operations in the EU from mid-2018, so Ican’t ignore it

The voice of business: views from around 500 EY clients in April 2018


23%

13%

25%

39%

3. Which of the following statements most closely matches your expectationsregarding the scope of the reports that tax administrations will be receiving?

A. I think the scope of the reporting obligation is too narrowand will lead to many potential tax avoidance schemes notbeing reportable

B. I think the scope of the reporting obligation is about rightand will give tax administrations useful information onpotential tax avoidance schemes

C. I think the scope of the reporting obligation is relativelybroad and will also generate a minority group of reports thatpose only limited or no risk of tax avoidance

D. I think the scope is extremely broad and will generate asignificant number of reports that pose only limited or no riskof tax avoidance

51%

34%

15%

4. What impact will the MDR Directive have on the tax environment?

A. I think it will have a very negative impact on the taxenvironment, driving high levels of compliance costs,disputes and/or more double taxation

B. I think that the effect will be largely neutral except for thecompliance costs – there will be much more to report, but thescope of the information is too broad to be useful

C. I think it will have a positive impact on the taxenvironment, driving higher levels of transparency andunderstanding between taxpayer and tax authority


Notes

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Notes

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The opinions of third parties set out in this publication are notnecessarily the opinions of the global EY organization or its memberfirms. Moreover, they should be viewed in the context of the time theywere expressed.Circular 230 Statement: Any US tax advice contained herein is notintended or written to be used, and cannot be used, for the purpose ofavoiding penalties that may be imposed under the Internal RevenueCode or applicable state or local tax law provisions.

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