As published on jpost.com, Thursday 21 May, 2020.
Tough new rules will require many innocent cross-border arrangements involving the EU to be reported to tax authorities in the EU and UK, commencing July 1, 2020. This is under Council Directive 2018/822/EU, commonly known as DAC 6. Israel, the UK and US already have similar tax shelter reporting rules.
A cross-border arrangement concerns: 1) more than one EU state, or 2) one EU state and one non-EU state, and 3) meets any of these criteria:
• Not all participants in the arrangement are tax resident in the same jurisdiction;
• At least one of the participants has dual residency for tax purposes;
• A permanent establishment linked to any of the participants is established in a different jurisdiction and the arrangement forms part of the business of the permanent establishment;
• At least one of the participants in the arrangement carries on activities in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction.
Such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
Cross-border tax planning arrangements may concern natural persons, legal persons (i.e. companies), and legal arrangements (i.e. trusts and foundations).
A cross-border arrangement will be reportable if it meets at least one of the prescribed hallmarks. For hallmark categories A, B and part of category C, an arrangement will only be reportable if it is also captured by the so-called main benefit test. This test means that one of the main benefits a person may be expected to derive from the arrangement is a tax advantage.
The five Hallmark categories are the following:
• Category A – Generic hallmarks linked to the main benefit test: arrangements that are confidential or give rise to performance fees or involve standardized documentation.
• Category B – Specific hallmarks linked to the main benefit test: acquiring a loss-making company to exploit its losses in order to reduce tax liability; or converting income into capital gifts or other categories taxed at a lower level; or a circular arrangement involving interposed entities “without other primary commercial function” or transactions that cancel each other.
• Category C – Specific hallmarks related to cross-border transactions; some of these hallmarks are also subject to the main benefit test: deductible cross-border payments between associated enterprises (25% of voting, profits or capital or participates in management) where the recipient is resident nowhere or is subject to no tax, zero or almost zero tax or preferential tax regime in the recipient’s country of residence; depreciating an asset in more than one jurisdiction; claiming double tax relief in more than one jurisdiction; or transfers of assets where there is a material difference in the consideration treated as payable in the jurisdictions concerned.
• Category D – Specific hallmarks concerning the automatic exchange of information and beneficial ownership: An arrangement is reportable if it has the effect of undermining the rules, or the absence thereof, on beneficial ownership or Directive 2014/107/EU or any other equivalent agreement on automatic exchange of financial account information.
• Category E – Specific hallmarks concerning transfer pricing: These include the use of unilateral safe harbors; the transfer of hard-to-value intangible assets when no reliable comparables exist and the projection of future cash flows or income are highly uncertain.
Any person that directly or by means of other persons aids, assists or advises with respect to designing, marketing, organizing, making available for implementation or managing the implementation of a reportable cross-border arrangement is an intermediary.
However, in the following situations, the obligation to report the arrangement shifts to the relevant taxpayer:
• When an intermediary is a non-EU intermediary.
• When there is no intermediary involved, i.e. an in-house arrangement.
• When the taxpayer is notified that an intermediary has the right to a waiver due to legal professional privilege.
Reporting is required within 30 days after the cross-border arrangement is made available or ready for implantation or the first step is implemented, or after an intermediary provides aid, assistance or advice directly or by means of other persons, whichever occurs first. First reporting is in principle due on August 31, 2020 for arrangements implemented between June 25, 2018 and June 30, 2020.
All multinationals should review whether their EU dealings will become reportable in July 2020. This includes Israeli privileged enterprises operating under the preferential tax regime in the Law for the Encouragement of Capital Investments, 1959.
As always, consult experienced tax advisers in each country at an early stage in specific cases.