This article was originally published on Law360 on June 9, 2020, and includes commentary from tax partner and tax controversy group co-founder, Kat Gregor, on the implications of the European Union’s new tax transparency rules, including certain conditions that could trigger disclosure obligations in cross-border situations.
The European Union’s new tax transparency rules involve certain conditions that could trigger disclosure obligations for some surprising cross-border situations, including preexisting transfer pricing arrangements, practitioners said during a webinar on Tuesday.
Common arrangements could unexpectedly get flagged for potential tax avoidance under the latest amendment (2019 Law360 56-102) to the EU’s Directive on Administrative Cooperation, or DAC6, according to Kat Saunders Gregor, a partner at Ropes & Gray LLP. Specifically, these arrangements could get pulled in under conditions that don’t look at whether the “main benefit” of an arrangement is to gain a tax advantage, she said during a webinar hosted by the American Bar Association’s Section of Taxation.
Instead of using the main benefit test, these conditions — referred to as hallmarks in the legislation — require reporting if the situation is simply flagged as a potential for tax evasion or abuse, without regard to whether it’s tax motivated, according to Gregor. For example, multinational corporate structures that use a single cash management function where there are extensive transfer pricing arrangements could expect to trigger DAC6’s disclosure rules, she said.
Under these broad rules, preexisting arrangements potentially are “going to create a reporting obligation on a going forward basis, even if these were transfer pricing agreements that have been in place for a long time,” Gregor said.
There is “a little bit of grandfathering” for preexisting arrangements, said Kimberly Majure, a principal at KPMG LLP who spoke during the webinar. However, she noted that if an entity in a cash-pooling arrangement switched roles from lender to borrower, for example, that modification could be enough to end the grandfathering.
Majure added that structures may have been changed due to the 2017 Tax Cuts and Jobs Act (115 P.L. 97) or disruptions in supply chains as a result of the novel coronavirus pandemic.
“Just be absolutely sure that you have your eye on any modifications,” she said.
The EU’s overall directive has allowed member countries to exchange certain personal and corporate tax information under a blocwide framework since 2013. As the newest amendment, DAC6 requires tax preparers to reveal strategies on cross-border arrangements to authorities, in an effort that the EU hopes will help stop tricks used to hide money from the public coffers.
The bloc’s finance ministers approved the amendment in 2018, and the European Commission, which is the EU’s executive arm, gave member states until the end of 2019 to adopt legislation that complies with DAC6. The directive was initially set to go into effect next month, but member states have agreed to a six-month postponement of the directive due to the pandemic, according to a June 3 announcement from Belgium’s Finance Ministry.
The hallmarks under DAC6 require disclosure from the arrangement’s intermediary — who could be a tax preparer, accountant or lawyer — if certain conditions are met, including the main benefits test in some cases.
The hallmarks are divided into different categories that involve, but are not limited to, mass-marketed schemes, buying a loss-making company to exploit losses to reduce tax liability, deductible cross-border payments between enterprises, beneficial ownership and the transfer of hard-to-value intangible assets.
Hallmarks that involve the broad main benefits test could trigger reporting obligations for a lot of commercial transactions, including in unexpected situations, Gregor said during Tuesday’s webcast. For example, the hallmark involving “substantially standardized documentation” could affect jurisdictions that are common for holding companies, she said.