• Obligation to report cross-border tax arrangements as from 1 July 2020

Obligation to report cross-border tax arrangements as from 1 July 2020

11 March 2020

Cross-border tax arrangements with a potential risk of tax avoidance that took place between 25 June 2018 and 30 June 2020 must be reported to the Belgian tax authorities by 31 August 2020 at the latest. The latter will share the information in a European database accessible to all European tax administrations. Tax arrangements set up as from 1 July 2020 must be reported within 30 days. The reporting obligation primarily applies to  BDO (as an intermediary service provider), but can, under certain circumstances, also shift to you as a taxpayer.

The obligation to report results from a European Directive [1] (also called DAC6 - referring to the English name of the first Directive from 2011 'Directive on administrative cooperation', or DAC for short) that was transposed into national legislation by Belgium at the end of 2019[2].

 

When to report

A planned arrangement is subject to the reporting obligation if the following three conditions are simultaneously met:

  • There is an arrangementarrangement
  • the arrangement has a cross-border character;
  • it has at least one of the 'essential characteristics' or hallmarks listed in the Directive. These are features which indicate a potential risk of tax avoidance.

There are no exclusions based on the materiality of the arrangement or the parties involved, unlike what is provided forin the  Country-by-Country Report under the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan.

 

Arrangement

The concept of arrangement is deliberately defined neither in the Directive nor in the law. This is in order to keep the scope of the reporting obligation as broad as possible on the one hand and to be able to react efficiently to (new) aggressive tax planning (structures) on the other hand. A reference to the hallmarks (which may be an indication of possible erosion of the tax base) was therefore considered more appropriate.

 

Cross-border nature

A arrangement is 'cross-border' if at least two Member States or one Member State and a non-European Member State are involved. Arrangements within the same Member State or arrangements that take place entirely outside the European Union should - in principle - not be reported.

However, the Directive gives Member States the freedom to extend the scope to domestic arrangements. Belgium has not made use of this option (unlike, for example, Poland and Portugal).

To determine whether there is a cross-border nature, one should look at the tax residency of the participants (e.g. different participants with tax residence in different jurisdictions) or the jurisdictions in which the participants carry out their activities. This seems to indicate that the location of the participants or their activities is (co-)determinant and that arrangement must trigger tax consequences in the hands of participants in several Member States/countries. In the absence of a cross-border aspect on the part of the participants, there would then be no fiscally aggressive cross-border arrangement. However, it is not entirely clear whether this means that the intervention of a foreign intermediary in a tax arrangement that only has tax consequences in Belgium and in which only Belgian taxpayers participate is not a reportable cross-border arrangement.

Furthermore, there must also be an active involvement of the participant/intermediary. A purely passive/ administrative role or where the taxpayer would be the object of the arrangement without active participation, would not be sufficient.

 

Hallmarks

Both the Directive and the law define 'hallmarks’ broadly as characteristics or features indicating a potential risk of tax avoidance. Both emphasize that it is an indication of a potential risk, not a presumption of tax avoidance. The other side of the coin is that if the Belgian tax authorities do not (immediately) react to a reported arrangement, this does not imply that they accept the validity or tax treatment of that arrangement.

There are 15 hallmarks. Some are derived from the engagement letter between the participant in anarrangement and an intermediary, such as the existence of a confidentiality clause or a success fee. Other characteristics include

< the use of a standardized structure;

< the acquisition of a loss-making company;

< a payment between associated companies that is deductible on the part of the payer and (almost) non-taxable on the part of the recipient;

< international restructurings;

< conversion of assets into another category in order to obtain lower tax rates (usually withholding tax);

< circumventing the exchange of information, e.g. by not making a declaration to the UBO register;

< …

As a general rule, an arrangement must be reported as soon as one of the aforementioned hallmarks is fulfilled, even if it not (or not only) set up for tax reasons. For certain hallmarks, the obligation to report depends on an additional 'main benefit test'. This means that the arrangement is only subject to the reporting obligation if the achievement of a tax benefit is an important motive. However, this additional test is the exception to the rule. For example, there is no 'main benefit test' for all transfer pricing related hallmarks. They must therefore always be reported. How the 'main benefit test' should be demonstrated/substantiated in concrete terms, however, is very unclear.

 

Which taxes fall under DAC6?

The scope of DAC6 is not limited to direct taxes. All taxes levied by local authorities (e.g. inheritance and gift tax, registration duties, various taxes) fall within the scope of DAC6. VAT, customs and excise duties and social security contributions are excluded from the scope.

Here as well, European Member States are free to extend the scope to include these taxes, but Belgium has not made use of this option (unlike, for example, Poland and Portugal).

 

Who has to report the arrangement?

In the first instance, the intermediary or service provider must report the arrangement. The intermediary is defined very broadly as any person who has designed, organised or implemented a tax arrangement ... or who has provided help, assistance, advice ... in setting up the tax arrangement.

The taxpayer himself only has to report in exceptional circumstances. In particular:

< when there is no intermediary. For example, when the arrangement was set up by the tax payer’s in-house tax department;

< if the intermediary is established outside the EU. For example, the Belgian subsidiary of an US company where the tax arrangement was designed by and imposed by the US parent and its tax advisors;

< when all relevant intermediaries can invoke their professional secrecy (within the framework of the determination of the taxpayer’s legal position and defence/representation in court) and thetax payer does not allow the intermediary to make the necessary disclosure.

Relevant intermediaries include tax advisers, lawyers, notaries, financial advisers, accountants and auditors.

 

Sanctions

The Directive itself does not provide for sanctions (only for joint and several liability of the reporting agents), but requires Member States to provide for adequate sanctions. In Belgium, the following system has been adopted:

 

Infringement    

 

fraudulent intent

with fraudulent intent or with intent to harm

incomplete provision of the required information

1,250 euro to 12,500 euro

 

2,500 euros to 25,000 euros

 

failure to provide, or late provision of, the required information

5,000 euros to 50,000 euros

 

12,500 euros to 100,000

 

           

The amounts within a scale will increase progressively in order to implement a sanctions policy and provide for higher penalties to be imposed if a person commits multiple infringements.

 

Entry into force

The reporting obligation will enter into force on 1 July 2020. Please note that from that date, arrangements that were carried out from 25 June 2018 must also be reported retrospectively. However, no fines will be imposed if the information relating to this period was provided by 31 December 2020 at the latest.

 

Difficult exercise

The deadline of 31 August 2020 is fast approaching. It is therefore high time to take action and to check now whether arrangements need to be reported, whether the required information exists and whether (and how) it can be efficiently extracted from the reporting systems. This will be a difficult exercise as there are still many questions and (practical) uncertainties. A circular letter is still in the making that will (try to) clarify a number of aspects. The question is, of course, when.

 

Contact

Questions regarding this subject can be addressed to your regular BDO contact or to our International Corporate Tax Team: