Tom Maguire: The EU and tax avoidance - is there a panacea in new disclosure regime?
The EU Commission has been busy publishing tax proposals recently. One got to directive level, meaning it must be enacted into Irish law. It relates mainly to transactions advised upon by "tax intermediaries", being tax advisers, accountants, lawyers etc. However, it goes way beyond that because it requires the adviser (or the taxpayer) to give the tax authorities significant information on taxpayer transactions.
This is primarily anti-avoidance law, so all stick with no carrot. Ireland is good at dealing with avoidance issues, eg the EU's recently agreed Anti-Tax Avoidance Directive wants EU countries to bring about a general anti-avoidance rule (GAAR); we've had one for almost 30 years. Now the EU wants to enact the above disclosure directive, and we've had something similar since 2010.
The new directive says if an intermediary advises on a transaction with certain tax attributes and T&Cs apply, then that intermediary has to forward details of that transaction and the taxpayers affected (humans and corporates alike) to the tax authorities. However, it's not always the tax advisers' responsibility. Some advisers have legal professional privilege, making it the taxpayers' reporting problem. Some taxpayers may have used their in-house tax teams, making it the taxpayers' reporting problem there also. Reporting doesn't necessarily mean the transaction is unacceptable tax-wise; rather the authorities want to know about it and there are costs for getting the disclosure wrong.
The directive allows each country to impose penalties for non-compliance. It leaves that up to the member states to come up with their own suitable punishment, although the penalties should be "effective, proportionate and dissuasive". Our penalties where T&Cs apply can comprise €500 per day of non-compliance.
Our disclosure regime and the EU's version differ in that their one deals with cross-border tax advantages, whereas ours looked only domestically, ie we looked after our Exchequer and now we may have to look after other countries as well.
The OECD's base erosion and profit shifting initiative suggested something similar but we now have an EU-written script which has to be effective by 2020. OK, that sounds some time away, but 2020 marks the start of reporting, and the stuff to be reported on starts from summer 2018. This applies across Europe. Say an accountant in an EU country advises on a transaction which affects an Irish taxpayer. It's possible, unlike in Ireland, that the accountant could have legal privilege in that country preventing him from disclosing the transaction there, so the taxpayer may have to report the transaction to their tax authorities. The idea behind this directive is to give authorities a heads-up on certain transactions which could then be legislated against by the various member states if necessary. Remember, Ireland already has a GAAR which says that an Irish tax advantage arising from a tax avoidance transaction and which is not caught by any other law may be removed.
The directive operates by saying that a transaction whose main benefit is tax avoidance, and which complies with certain "hallmarks", has to be reported to the authorities where the transaction was designed. One example of a hallmark is the parties would rather the transaction be kept confidential from the tax authorities, or indeed other advisers. Our current law operates similarly but the directive goes further by ignoring the main benefit test in some cases. There the directive says that if you took a particular action then you have to inform the tax authorities accordingly, irrespective of your intention for engaging in the transaction. Therefore tax avoidance mightn't even have entered the taxpayer's head but it still must be reported.
One example includes an arrangement for transfers of assets where there is a material difference in the amount treated as payable for the assets in the jurisdictions involved. This would mean that cross-border transfers of assets would need to be reviewed to determine their values are similar in the respective countries or face reporting.
Ireland has rules for transfers of assets between connected parties such that they will be regarded as being transferred for market value and the capital taxes can apply to any gift element. When the connected party rule was brought about for capital gains tax in 1975 the then-finance minister noted the absence of a main purpose test and said that "I fear we must, in the words of St Paul, see the innocent suffer for the guilty", and it would appear the EU is applying the same logic.
Some years ago, following the OECD's launch of its study on the role of tax intermediaries, a former Revenue Commissioners' chairman said: "Intermediaries in Ireland would be nervous if I gave them unstinting praise - although generally they deserve it." Modesty prevents me from commenting further. That said, although affecting advisers, this directive also affects taxpayers directly where they have to report themselves, and indirectly through subsequent law changes which may be subsequently imposed because of this heads-up system.
From this summer, when the directive comes into force, it's critical taxpayers understand whether any transactions they enter into are reportable. The taxpayer may not be engaging in tax avoidance at all, but some of the directive's script is written like Tommy Lee Jones's response to Harrison Ford's denial of murdering Ford's wife in The Fugitive movie…"I don't care".
Tom Maguire is a tax partner in Deloitte
Sunday Indo Business