By Enza Sonetti
On May 25th, the EU Council formally adopted, Council Directive (EU) 2018/822, amending Directive 2011/16/EU (DAC 6) which had been promoted by the European Commission to improve transparency in cross-border tax-planning arrangements.
DAC 6 is intended by EU lawmakers to represent an important tool to understand the structure of tax planning arrangements and recognize loopholes in legislation that tax advisors can unlawfully use to reduce tax burdens, thus increasing tax avoidance with a consequent negative impact on the functioning of the market. According to DAC 6, intermediaries or taxpayers, if in charge of their own tax planning, will have to disclose potentially aggressive tax planning arrangements in which they are involved as part of their profession, either in designing or promoting them. To enhance new disclosure duties, the EU requires Member States to establish penalties that should apply in cases of non-compliance, as long as they are effective, proportionate and dissuasive, but does not fix a common minimum fine or the type of penalty to apply, as would have been advisable. Moreover, in order to simplify the identification of reportable cross-border arrangements and ensure tax certainty, the Directive refers to generic and specific hallmarks that should be met: in certain cases, indicated in letter A and B of Annex IV, hallmarks also need to satisfy the so-called “main benefit” test that is a reminder of the principal purpose test provided for in BEPS Action 6.
With reference to disclosure duties, it is clear that they can help to better find loopholes in tax law and to correct mistakes and failures, straightening legal certainty that benefits everyone. Tax law uncertainty, whether through unexpected and frequent changes, retroactivity in tax law, lack of regulation, or rules with ambiguous, complex or obscure meaning can increase businesses’ difficulties in planning activities and undermine their development. Likewise, uncertainty due to temporary provisions or unpredictable implementation can affect investments as they don’t guarantee a coherent and fair system. From another point of view, the internationalization of businesses’ activities deriving from integrated markets and the difficulties in building a unilateral and coherent international legal framework, increase uncertainty in tax law and have a strong impact, not only on investments but also on tax authorities’ ability to build a strong and reliable relationship with taxpayers and their tax advisors.
Tax transparency vs. tax certainty
That being said, it must be pointed out that tax transparency should not be considered in isolation from other principles, in particular from tax certainty for various reasons. First of all, with reference to tax authorities’ duties, transparency means “availability of information” for taxpayers. In this sense, rules have to be clear and with unequivocal meaning to allow democratic control of government decisions and law application. On the other hand, from a taxpayers perspective, transparency implies disclosure and reporting duties having some important consequences: these obligations constitute a precondition for fair and impartial tax treatment as they enhance countries’ strategies to prevent aggressive tax planning. Moreover, transparency helps to understand taxpayers’ behaviour and the reasons triggering the adoption of tax planning schemes: more specifically, increased duties of disclosure contribute to help both parties within a tax relationship to better know their respective standpoint as well as the considerations inspiring their choices. In this sense, tax transparency would also have a function as a deterrent, as increased disclosure and reporting duties would consequently raise the risk of being detected and therefore, subjected to penalties. It is therefore clear, how tax transparency can be a crucial vector to boost tax certainty. In this context, as the UK Disclosure of Tax Avoidance Schemes (DOTAS) taught, disclosure duties help to solve problems related to vague legislation and to close loopholes ensuring a clearer and more secure law framework.
Nevertheless, looking at the new disclosures duties provided by DAC 6, it must be noted that it seems to present some problems regarding tax certainty profiles. Art. 8ab p. 12 of Directive, indeed, asks “each Member State to take the necessary measures to require intermediaries and relevant taxpayers to file information on reportable cross-border arrangements the first step of which was implemented between the date of entry into force and the date of application of this Directive”. The information shall be reported by the 31st of August 2020. Therefore, although retroactive effects of this provision have been limited compared with those originally intended, it remains a questionable rule. From many points of view, the Directive is generic and indeterminate, for example, the penalties or the professional privilege that allows the intermediary to be “exempted” from reporting obligations. Additionally, several questions arise about the identification of the moment in which the obligation to file information is required by the taxpayer or the intermediary, especially when it refers to partial advice. In this sense, this provision could affect legal certainty, as in many countries intermediaries engaged in cross-border transactions will have to comply with reporting obligations that refer to arrangements implemented in absence of national transposition measures.
New provisions are expected to have relevant consequences, as they harmonize disclosure obligations at EU level, ensuring fairness and equity under substantive and procedural profiles in tax relationships. It is therefore unclear, the reason inspiring this provision that seems to reach a dissuasive “announcement effect” that privileges transparency but on the other hand disadvantages tax certainty.