Cross-border tax advice?

Informing the tax authorities will often be mandatory.

The Dutch legislative proposal for the mandatory exchange of information for certain cross-border advice stems from a European directive (2011/16/EU). This European directive imposes on tax advisers and other intermediaries who advise on tax the obligation to exchange information with the tax authorities about certain advice. The purpose of this European legislation is to prevent tax evasion. On 18 October, the Memorandum of Reply to this legislative proposal was published.There have been no significant changes  to the earlier consultation draft bill, although clarifications have been made on a number of points. The Tax Administration is also working on a Guideline, which is not expected until the first quarter of 2020. We assume that many of the questions raised in the consultation will be answered in the Guideline.

In this article you can read about the Dutch proposal.

This publication is up-to-date up to and including the parliamentary documents published on 18 October 2019 (updates bold and in italics).

The purpose of this European legislation is to prevent tax evasion. The exchange of information should enable EU member states to adapt their tax laws and regulations to counteract these in itself legal, but undesirable, cross-border tax structures. In addition, this legislation may have a behavioural impact, in the sense that taxpayers may refrain from using constructions that fall within the scope of these mandatory disclosure rules. In short, the legislation covers all taxes except value added tax (VAT) and excise duties.

Hallmarks

The mandatory exchange of information captures cross-border transactions that meet certain characteristics, the so-called ‘hallmarks’. These characteristics are closely defined in the EU Directive and the Netherlands has therefore adopted these characteristics in exactly the same terms in the draft bill. The hallmarks consist of generic characteristics, which relate to the relationship between the ‘intermediary’ and taxpayer (for example, when an intermediary is entitled to a remuneration depending on the amount of the tax benefit from the construction), and specific characteristics, which relate to substantive aspects of the construction (for example, when a cross-border payment is made to a company that is situated in a country that levies (virtually) no tax).

The Netherlands has chosen not to go further than the EU Directive. For example, no additional hallmarks, apart from those of the directive, have been included in the draft bill.

Terminology

The Dutch implementation also follows the terminology used in the EU Directive. As in the directive, certain terms, such as ‘arrangement’ or ‘intermediary’, are deliberately not explained in detail. The intermediary is the one who sets up the construction, thinks it out, etc. The directive aims to discourage certain behaviour. It fits within this objective to refrain from issuing precise definitions and have the intermediaries take their responsibility.

Every ‘person’ can be an intermediary. In general, tax advisors can be regarded as intermediaries. Who in each individual case is considered as intermediary, depends merely on the employment relationship between an ‘intermediary’ and the person who actually provides the tax advice. If an in-house tax expert is employed by a relevant taxpayer, then that tax expert himself does not qualify as intermediary, instead his employer is usually deemed to be the reportable person.

A group company could also qualify as an intermediary. This is the case, for example, when the taxpayer is advised (in part) by its own tax department that is part of a group company that is not a party to the reportable cross-border construction. This group company itself is an intermediary then and as such, in principle, obliged to report. 

Yet most of the time, no intermediary can be appointed within a group and the group is ‘only’ the ‘relevant taxpayer’. In that case often an external tax advisor can be appointed as the intermediary and has, therefore, the obligation to report. 

Guidance

The use of open standards instead of more detailed rules may be understandable from the point of view of the legislator, but it also creates a certain lack of clarity and uncertainty for intermediaries and enterprises. This is undesirable, especially since the penalties for failure to comply with the notification obligation can be high. It has now been promised that a Guideline will be drawn up in which a number of concrete constructions will be indicated as to whether or not they fall within (one of) the hallmarks. 

Yet, it won’t contain a ‘white list’ of constructions that are not reportable. The first version of the Guideline will probably be published in the first quarter of 2020. Over time, items will be added to the Guideline on the basis of practical experience. 

An MDR team will be set up within the Tax Administration to act as a help desk for intermediaries and taxpayers; this team will draw up the aforementioned Guideline as well. The team will also be responsible for communication with other countries and the European Commission.

Reporting obligation upon implementation

There is a very tight deadline for reporting the structures: they must be reported within 30 days after the structure is ready for implementation or (if this is earlier) the first step in the implementation has been made. 

The Dutch consultation proposal already provided welcome clarification on the first step of implementation. Cross-border constructions must be reported after this first step.

The Dutch draft bill clarifies that there is no reporting obligation for cross-border constructions which, although designed for a specific taxpayer, ultimately do not reach the ‘finish line’. 

The State Secretary repeats in the Memorandum of Reply: the ideas that preceded the final chosen construction do not need to be reported. The decisive factor for the notification obligation is whether the construction has either been made available to the taxpayer or is ready for implementation. 

The structures must be reported to the Tax and Customs Administration via a digital system that the Tax Administration will develop in the future.

Main benefit test

For several hallmarks, the arrangement only becomes reportable if the so-called ‘main benefit test’ is also met. 

• The main benefit test is satisfied if it can be demonstrated that the most important advantage or one of the most important advantages that can reasonably be expected from a construction, taking into account all relevant facts and circumstances, is to obtain a tax advantage. This tax advantage can arise both within and outside the EU. The State Secretary now indicates that the main benefit test is met if there is “a (series of) construction(s) with an – at least partly – artificial character that is – at least partly – aimed at obtaining a tax advantage”.

• Deferral of taxation may be an advantage within the meaning of the main benefit test.

• If there are sound business reasons for a construction, without artificial elements being added, then it can be assumed that the construction does not serve to obtain a tax benefit within the meaning of the ‘main benefit test’. The section on ‘artificial elements’ is new compared to the consultation. 

• The main benefit test also isn’t met if double taxation is avoided. 

• A construction to which a favourable tax regime applies will usually be set up in accordance with the underlying idea of the favourable tax regime. Making use of this favourable tax regime is not regarded as ‘aimed at obtaining a tax benefit’ as referred to in the main benefit test. Dutch examples include the tonnage regime and the innovation box. 

• It is also specifically stated that if a mortgage with deductible interest is used in a cross-border situation, the main benefit test will not be met.

Penalties

If it is due to the intent or gross negligence on the part of the intermediary or the relevant taxpayer that the reporting obligations are not fulfilled, have been fulfilled late, are incomplete or incorrect, this constitutes an offence for which an administrative penalty may be imposed of up to EUR 830,000 (amount 1 January 2018 and 2019). In the Memorandum of Reply, the State Secretary states that sanctions won’t be imposed lightly in the case of cross-border structures subject to a reporting obligation whose first implementation step was taken between 25 June 2018 and 1 July 2020, because of the material retroactive effect of the rules. 

Timing and practical information

Cross-border constructions of which the first step in the implementation has been taken between 25 June 2018 and 1 July 2020 and which meet one or more of the hallmarks and (in some cases) meet the Main benefit test, are already within the scope of the reporting obligation (in 2020).

The proposal has yet to be debated in the Lower and Upper Houses, respectively. This will not take place until September at the earliest. The bill isn’t a part of the 2020 Tax Plan and adoption by the Senate is not expected to take place until December of this year. Before the parliamentary procedure in the Lower House is completed, a draft of the general administrative order will be submitted to the Lower House, containing rules on when and how the data and information should be provided to the tax authorities. 

What does it mean for you?

If you are advised about cross-border transactions with one of the aforementioned characteristics (hallmarks), it is possible that your advisor will have to exchange information about this transaction with the local Tax Administration.

In certain cases, you will have to report yourself, for example if you do not use an adviser but do carry out cross-border transactions that meet one of the characteristics. If, in those cases, you do not comply with reporting obligation, you run the risk of being confronted with a penalty. Coordination between you and your intermediary(s), possibly including your own advising group company, is crucial for a smooth process of the reporting obligation.

Also in view of the tight notification period of 30 days after completion of the advice or the first step of implementation, proper coordination is already required during the advisory process. And also, for example, in a situation in which intermediaries in several countries are involved in the advice, this also requires good coordination in order to comply with all obligations. We expect that the reporting obligation will become an integrated part of the advisory process between taxpayers and tax advisers. 

The position of individual taxpayers could be further investigated on the basis of the exchange of information,

While the State Secretary previously indicated that he did not expect this to lead to deviations from tax returns frequently, he now indicated that “data analysis and other innovative tooling” will be used to select which reports would be further investigated. 


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