EU Directive 2018/822: Opening Doors for a Common Cooperative Compliance System on Taxation?

By Marina Serrat

Last 25 May 2018, Council Directive (EU) 2018/822, amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements, was passed. BEPS Action 12 on mandatory disclosure was shaped to become hard law, which raises several questions, especially in respect of the role of intermediaries.

Passion for data

Dataism seems to be the philosophy of the 21st century. It is the philosophy of the Digital Era, where information is the most valuable asset. According to Dataism, reality is based on data. Therefore, everything that is not duly registered does not properly exist and might not be real. All kinds of realities have to be converted to empirical data, because Dataism strives to know absolutely everything, and the only way to do it with certainty is by recording all information. Otherwise, it would not be testable by empirical means. Thus, modern societies need data, they need information. Tax systems, as an essential part of society, are nurtured by data, so the more information they obtain from a taxpayer, the more control they will have, reducing opportunities for non-compliant practices.

Transparence and trust

Transparency is the most effective political power to control a society. It presents itself as an invisible power, kind and seductive, because it appears to exert no real control; it imposes no pressure, and thus people have the feeling of being more free, and consequently, they become more prone to collaborate with those authorities that do not really “oppress” them. The same thing happens in taxation: taxpayers will show themselves to be more compliant and open to give their information to Administrations that are transparent.

Mandatory disclosure as an ex ante mechanism to reduce risk

Since Directive 2011/16/EU (DAC1) came into force with the automatic exchange of information (AEOI) of non-financial relevant information for tax purposes, the standard of transparency has, like gum, not stopped stretching, and it seems to have no end: financial information was also incorporated into the standard (DAC2, 2014/107/EU2), followed by APAs and rulings (DAC3, 2015/2376/EU), Country-by-Country Reporting (DAC4 2016/881/EU), UBO information coming from Anti money laundering standards (DAC5, 2016/2258/EU), and, finally, DAC6 closed the circle (or has it?) by imposing mandatory disclosure of certain aggressive tax planning structures on intermediaries before they put them into place. Mandatory disclosure is thought to act as an ex ante mechanism to dissuade potentially aggressive tax planning.
Action 12’s improvement: Limitless transparency?

Basically, DAC6 is sustained on two pillars: mandatory disclosure and AEOI. Therefore, it goes beyond the core idea of BEPS Action 12, i.e. to prevent those intermediaries (planners, creators) of tax structures that take advantage of international taxation loopholes and weaknesses from abusing the system in order to avoid taxes. Thus, DAC6 widened the type of data to be automatically exchanged, because most of those tax schemes have cross-border character and, in order to have a fairer tax system that information needs to be shared among all affected countries. This is part of the Dataistic and transparent society: the more information one State is willing to share, the more transparent it is considered and, thus, the more trustworthy it becomes for other States and its own citizens. Nowadays, all tax systems rely on cooperation. However, cooperation is only achieved by showing a transparent Administration that complies with globally accepted standards.

Blazing the trail for an EU common tax compliance system

Mandatory disclosure of this kind of information might increase the mistrust of tax intermediaries, who are an essential part of a modern tax system. This generates a need to reconsider tax relations. Taxpayers (company Boards) and intermediaries (tax planners) will need to cooperate closely: the Board will have to issue its position on the risks of certain operations, and will have to approve operations with risk. In essence, both actors will have to design their fiscal strategies together, making a reasonable interpretation of fiscal legislation. DAC6 introduced tax compliance in Europe for a tiny part of the whole system: cross-border aggressive structures.

Are we really ready for DAC 6?

As was said at the beginning of this post, information is a very valuable asset. Widening tax transparency standards could result in the Tax Authorities knowing everything about their taxpayers. However, and according to General Data Protection Regulation, tax-relevant information cannot be freely accessed. This situation should make us think about the following:

  • is a good and trustworthy Administration one that knows absolutely everything about us without having to ask us to access our own personal information?; and
  • would it be necessary to give taxpayers more access to their own data, since the amount of information Tax Authorities holds makes it almost impossible to cheat?

Cooperative compliance-inspired systems are only efficient if there is trust between the actors (Administration-Taxpayers-Intermediaries). Although most of EU Member States tax systems are not based on compliance mechanisms, it seems to be the future trend. Are we really ready?