EU Introduces New Reporting Requirements for Certain Cross-Border Transactions

Introduction

On May 25, 2018, the Council of the European Union formally adopted Council Directive 2018/822/EU on the reporting of "potentially aggressive" cross-border tax-planning arrangements. The first reporting needs to be made by August 31, 2020, on the basis of national laws of the EU Member States which won't be implemented until the end of 2019 (Council Directive 2018/822/EU is technically an instruction to the EU Member States to create such national laws according to the directive's principles, not a law to be applied by EU citizens). Most importantly, reportable arrangements are those entered into on, or after June 25, 2018 (the date of entry into force of the Directive). Therefore, businesses, investors and foremost intermediaries such as banks or brokers need to plan for reporting now.  The approach taken is very similar to the U.S. approach with respect to "Reportable Transactions" with the enactment of the American Jobs Creation Act of 2004. This provision has been credited as causing a significant reduction in tax shelter transactions in the United States.

What is a cross-border arrangement?

A cross-border arrangement is any transaction (including a series of transactions) with a qualifying cross-border element. The scope is broad. The cross-border requirement will be met if not all parties to the transaction are tax resident in the same jurisdiction. But even if all parties to the transaction are tax resident in the same country, a qualifying cross-border element may be established by the relevance of a permanent establishment, a dual tax residency, or even mere activity of any party in a different jurisdiction other than that of the other parties.

What makes a cross-border arrangement reportable?

An arrangement becomes reportable if certain hallmarks are fulfilled. Hallmarks include (1) the occurrence of remuneration of advisors based on the tax saving of an arrangement or the agreement of non-disclosure or standardized documentation; (2) loss-refresher models or requalification of income into lower-taxed types of proceeds or circular transactions on the basis of round-tripping of funds; (3) "white income" scenarios payments deductible at the level of one participant are not taxed at relevant rates at the level of another participant who receives the payment, double-dip scenarios, payments to participants in no-tax-environments or almost-no-tax environments, valuation mismatches; (4) arrangements undermining the reporting of financial account information or non-transparent ownership structures; and (5) aggressive transfer pricing. Some hallmarks will only taint the arrangement as reportable if obtaining a tax advantage is the main benefit or one of the main benefits, whereas others will unconditionally taint the arrangement, regardless of the purpose.

Who is liable to the reporting?

As a matter of principle, the reporting obligations are on the so-called intermediaries of the arrangement if they have EU Member State nexus, not on the participants of the arrangement. Intermediaries "design, market, organize, make available for implementation, implement or assist in the implementation" of reportable arrangements. They predominantly will be banks, brokers, other market-makers and advisors of all sorts. Advisors may be granted exemption by EU Member States from reporting as per their "professional privilege." They will, however, be liable for notifying other intermediaries or the client of their reporting obligations. If there is more than one intermediary involved, all intermediaries shall be liable for reporting. If no intermediary qualifies for reporting, the reporting obligation will residually be on the participants in the arrangement itself, with a priority of participants set out in the directive.

What is the reportable content?

Minimum reporting requirements will include (1) the identification of intermediaries and relevant taxpayers, including their name etc.; (2) the hallmarks that make the arrangement reportable; (3) the "content" of the arrangement including a reference to its name in the market (such as "Goldfinger" or "Cum-Ex" to name two German arrangements); (4) the date of implementation; (5) the national provisions supporting the tax effects of the arrangements; (6) the value; (7) the concerned EU Member States; and (8) other persons "affected by the arrangement," including the EU Member States to which such persons are linked.

What are the consequences of non-reporting?

The EU Member States will implement effective, proportionate and dissuasive penalties for infringements.

What has been the reception of the market so far?

Participants in the affected market sectors have so far expressed concerns that the new reporting obligations will mean more onerous compliance, that they may be in conflict with data protection guarantees throughout the EU, and may have other questionable aspects to them.  They argue that forced transparency to discourage transactions is not good policy. Individual EU Member States' governments have already expressed that they find these concerns unconvincing. Changes to the directive in the near term or to prevent its conversion into the national law of the EU Member States should not be considered likely.     

What needs to be done now?

As stated above, participants and intermediaries of cross-border arrangements need to review which of the (envisaged) transactions will be reportable under the new rules and who will be liable for reporting and in which EU Member States. Such persons immediately need to collect the necessary data to comply with the August 31, 2020 reporting deadline. Underlying contractual documentation of reportable or potentially reportable transactions should be amended to ensure proper cooperation among all participants and intermediaries to provide data which the intermediary needs to report. 

Please contact the Orrick European Tax partners, who are listed below, Peter Connors or John Narducci for any questions you may have in respect to the above.