As published on: internationaltaxreview.com, Thursday 13 July, 2023.
Paolo Ludovici and Marlinda Gianfrate of Gatti Pavesi Bianchi Ludovici outline the issues surrounding an expected further revision of Directive 2011/16/EU on administrative cooperation in the field of taxation.
At the Economic and Financial Affairs Council meeting which took place on May 16 2023, the Council of the European Union formally approved a compromise for the latest revision of Directive 2011/16/EU (DAC) on administrative cooperation in the field of taxation. The draft directive (DAC8) is subject to a consultation procedure. The council will formally adopt the proposal once the European Parliament has adopted its consultative report.
DAC has been amended multiple times to improve the exchange of tax-related information. DAC8 expresses a further EU commitment to the goal of tax transparency: it will amend and extend the scope of DAC with regard to the reporting and automatic exchange of information on crypto-assets and the exchange of tax rulings for wealthy individuals.
Cross-border rulings on HNWIs
With reference to the exchange of information on rulings on high-net-worth individuals (HNWIs), DAC8 aims at a further enhancement of administrative cooperation that guarantees tax transparency and tax fairness among EU member states (MSs). The proposal would reduce the incentives and advantages leading to harmful tax competition through transparency measures related to tax rulings and advance pricing arrangements, which have already been targeted by DAC3.
Rulings for HNWIs are not provided for by all MSs, and even though their numbers are relatively limited, the introduction of legal frameworks to attract HNWIs, foreign pensioners and highly skilled workers by using preferential tax regimes in some MSs is significant from a tax perspective. The proposed directive followed the European Parliament’s expressed concern that the absence of the exchange of this type of information leaves taxation loopholes that can be exploited for tax evasion and avoidance as they create distortions in tax bases between MSs.
The scope and application of the provision on HNWIs
Focusing on the scope of the exchange of rulings on HNWIs, DAC8 does not give a definition of who qualifies as a HNWI. In general, the definition of the HNWI should be country specific.
Not all cross-border rulings concerning the tax affairs of one or more natural persons fall within the scope of DAC8. The final provisions identify the following alternative criteria:
The amount of the transaction, or series of transactions, of the advance cross-border ruling exceeds €1,500,000 (approximately $1,600,000), or the equivalent amount in any other currency, and such amount is referred to in the ruling; and
The ruling determines whether a person is resident for tax purposes in the MS issuing the ruling.
If the advance cross-border ruling covers a series of transactions regarding different goods, services or assets, the amount shall comprise the total underlying value. The amounts shall not be aggregated if the goods, services or assets are transacted several times.
Advance cross-border rulings concerning taxation at source with regard to non-residents’ income from employment, director’s fees or pensions are excluded, unless the amount of the transaction, or series of transactions, exceeds the above-mentioned threshold.
MSs introduce changes to the European Commission’s initial proposal, according to which the persons concerned are those who hold a minimum of €1,000,000 in financial or investable wealth, or in assets under management, with the exclusion of the individual’s main private residence.
The provisions related to automatic exchange with respect to advance cross-border rulings should be transposed into national law by December 31 2027 and applicable as of January 1 2028 for rulings issued, amended or renewed after January 1 2026 (according to the initial proposal for rulings issued, amended or renewed between January 1 2020 and December 31 2025).
In general terms, the provisions for the exchange of cross-border rulings on advance cross-border rulings and advance pricing arrangements as of DAC3 apply.
The exchange of cross-border rulings is in two stages. According to “the systematic communication of predefined information to another MS, without prior request, at pre-established regular intervals” (mandatory automatic exchange), a basic set of information must be sent to all MSs by the competent authority of the MS concerned. In the second stage, MSs that can demonstrate that the information is “foreseeably relevant” may request additional information, including the full text of a cross-border ruling (exchange of information on request).
The exchange of cross-border rulings: open issues
The necessity to tackle tax evasion and aggressive tax planning effectively is evident, and the exchange of information for tax purposes is a relevant tool to improve tax authorities’ ability to detect and fight tax evasion and avoidance.
The EU has enacted several measures and provided a multitude of tools directed at identifying and sanctioning evasive and abusive conduct. Creating new frameworks, instead of developing those already in place to make them more effective and coherent in their application by MSs, may have the effect of multiplying costs – for taxpayers and tax administrations – without providing a material benefit.
One should consider the necessity and effectiveness of continuously widening the exchange of information requirements.
Several critical issues have already been pointed out by some public bodies, such as the European Court of Auditors during its examination of the exchange of tax information in the EU. In its conclusion, the European Court of Auditors found that the exchange of tax information between MSs was not yet sufficient to ensure fair and effective taxation throughout the internal market.
In general terms, observers considered firstly that there is a lack of implementation: the information collected by MSs lacks quality, completeness and accuracy.
A second issue is raised with reference to transparency of data: MSs should be more transparent about the information they use, to what extent and with which results. The path of tax-relevant information must be traceable and measurable.
The potential uses of the information received under the exchange of information are wide-ranging. They include risk assessments, tax audits and tax collection. Nevertheless, the use of information received under the exchange of information differs between MSs, and in general there is no clarity about the analyses and the use of information on cross-border transactions in their taxation follow-up.
For the exchange of information system to work, it is therefore necessary to ensure the functioning of adequate and common procedures for the risk analysis of incoming information and use them as extensively as possible.
At the same time, it is indispensable to measure the benefits of the exchange of tax information system.