Striking a taxing rights balance between jurisdictions has never been more complex. Initiatives to combat tax evasion and aggressive tax planning have constantly been on the agenda of the world’s leaders. The world has seen several series of directives introduced for the disclosure of cross-border tax arrangements based on the “follow the money” approach to tackling the erosion of the tax base through tax haven or non-compliant jurisdictions. This erosion of the tax base has been an ongoing issue for many jurisdictions that have experienced a steep rise in public deficit and losses of national tax revenues at a global level.
There is an existing array of directives and proposals for tax reform that have led to the European Commission’s new initiative, which aims to tackle the role of enablers that facilitate tax evasion and aggressive tax planning in the European Union. The most notable of these is the EU Directive on Administrative Cooperation (DAC6). DAC6 represents the biggest experiment of rules on automatic exchange of information in the European Union since the imposition of the Common Reporting Standard (CRS) back in 2014.
Unlike CRS reporting, which targets financial institutions, DAC6 focuses on mandating disclosure from intermediaries and, in some instances, from the taxpayers.
DAC6 is the sixth amendment to the long-running series of directives designed to encourage cross-border information exchange in the European Union. The CRS was implemented in the European Union in 2014 under DAC2. It is a product of the ongoing international effort by the Organisation for Economic Co-operation and Development (OECD) under its base erosion and profit shifting (BEPS) framework.(1)
Similarly, the new proposal tackles the role of enablers, some of which design, market and help set up structures in non-EU countries that erode member states’ tax base through tax evasion or aggressive tax planning. Such structures may use entities without substance to take advantage of differences between national tax systems or tax treaties. Enablers were put in the spotlight following the high-profile publication of the Panama and Pandora Papers. Following their publication, both the European Parliament and the European Economic and Social Committee have put pressure on the European Commission to introduce targeted rules for enablers.
Anti-tax avoidance measures have also been put into place to target taxpayers through the Pillar II Proposal and the Anti-Tax Avoidance Directive (ATAD) series. The latest one of these measures is ATAD 3 (or the EU Unshell Directive), which targets the misuse of tax treaty benefits and treaty shopping practices by taxpayers unable to prove substance and actual economic activity. These measures are like the BEPS 2.0 Pillar One and Pillar Two proposals on profit allocation and nexus as well as on global minimum taxation. The initiative will also co-exist with the EU Anti-Money Laundering Directive (AML) Directive and the EU Whistle-blowers Directive.
The European Union is aiming to produce a precise definition of what constitutes “aggressive tax planning” and put in place effective rules to be implemented by tax administrations that will prevent enablers, especially those outside the European Union, from assisting in tax evasion and aggressive tax planning. This precise definition is something that is yet to be achieved. DAC6, for example, does not provide a definition, leaving space for wide interpretation and tax planning manoeuvres.
In the call for evidence for an impact assessment, and apart from what is stated above, the Commission stresses that the objectives of a legislative initiative will be based on the principle of proportionality. A range of policy options might include:
- a requirement for all enablers to carry out dedicated due diligence procedures;
- a prohibition on facilitating tax evasion and aggressive tax planning combined with due diligence procedures and a requirement for enablers to register in the European Union; and
- a code of conduct for all enablers.
Along with the chosen option, a new measure to boost transparency in respect of EU investments abroad could be developed. This would require reporting (both by individuals and legal persons) of participation where they hold more than 25% of shares, voting rights, ownership interest, bearer shareholdings or having control via other means in a non-listed company located outside of the European Union.
The new initiative will likely have an impact on the following stakeholders:
- businesses engaging and operating in the European Union, including those that avail of and provide tax advice or services;
- individuals resident in the European Union, including those that avail of tax advice or services; and
- the tax administrations of EU member states.
It is noted that the measure is likely to have impacts on the economy and competitiveness of the European Union. It is also expected to have social consequences and some additional impact on administrative and compliance costs. However, it is unlikely to affect environmental or fundamental rights.
The latest measure will be built on the existing Unshell initiative and take into consideration statistics collected under the directives on administrative cooperation (eg, numbers of tax arrangements and intermediaries affected and estimation of the compliance costs for companies, enablers and public authorities).
Stakeholder groups have been consulted through the public consultation, which closed on the 12 October 2022. Despite the global move by tax authorities towards transparency, the new directive is expected to be drafted in a way that ringfences fundamental rights and strict adherence to principles of proportionality and necessity, principles that have been at the forefront of Court of Justice of the European Union (CJEU) case law.
For further information on this topic please contact Elena Christodoulou at Elias Neocleous & Co LLC by telephone (+357 25 110 110) or email ([email protected]). The Elias Neocleous & Co LLC website can be accessed at www.neo.law.