European Union: What Do Mandatory Disclosure Rules Mean For Companies?

Last Updated: 8 February 2019
Article by Egon Snijders and Predrag Maletic

Most Read Contributor in Netherlands, September 2019

The latest European Union legislation in relation to taxes, the Mandatory Disclosure Rules, require EU intermediaries - the parties that provide advice and assistance on tax, legal and banking matters, among others - to report a cross-border structure or transaction if it is of a tax-aggressive nature. Although the primary reporting requirement lies with the intermediary, the reporting obligation can shift to the taxpaying entity or individual.

It's the latest step in the EU's response to the OECD's BEPS, or Base Erosion and Profit Shifting project, which aims to bring transparency to global company tax matters. And though these new rules prescribe a reporting deadline of July 2020, this is something to look at now – it will go back to records from mid-2018.

What is this latest update about?

The Council Directive 2018/822 of 25 May 2018 amends Directive 2011/16/EU to provide for mandatory automatic exchange of information in relation to reportable cross-border arrangements. It requires EU intermediaries, such as tax and legal advisory firms, banks and other service providers (and in certain cases the taxpayer), to actively disclose "tax aggressive" cross-border structures or transactions with EU nexus to the tax authorities of EU Member States.

There is a list of "hallmarks" to help guide intermediaries and taxpayers in what should be reported. However, these hallmarks are broad in scope, and its interpretation is expected to be a subject of discussion.

EU Member States have until the end of 2019 to enact the Directive into local legislation - some, like Poland, already have - and it's expected the Netherlands, Germany and Lithuania will follow soon as early adopters.

It's another string in the tax transparency bow for the EU, a way to ensure that EU tax authorities can get better insights into a company's tax planning behaviour, but also aims to discourage taxpayers implementing structures which may be viewed tax aggressive.

Why do companies with EU presence need to take notice of this Directive?

It doesn't just relate to intermediaries, though - the reporting requirement can shift to the taxpayer, that is the company with EU presence. This could be the case if there is an intermediary involved that doesn't have a presence within the EU, or the obligation to disclose may not be enforceable upon this intermediary due to legal professional privilege. The taxpayer can also be faced with a reporting requirement if no intermediary is involved because the taxpayer designs and implements a structure in-house.

Late reporting and/or incorrect reporting can have grave consequences in terms of monetary penalties, criminal charges, as well as leading to reputational damage for the company in question.

Strong governance can help companies maintain control of reporting

Companies with EU presence should ensure their internal governance and policies are up to date, have a clear overview of their transactions in scope for reporting, and as much as possible are in control of what's happening with their information.

It could be that you're working with multiple intermediaries, and so you want to be aware of what is being disclosed, as well as know and understand the trigger elements of the reporting and try to ensure that there is accuracy and consistency in reporting. If some parties report to the authorities and others don't, that will only raise questions with the tax authorities. If possible, have one lead company to do the reporting - which means your internal teams need to be absolutely on top of what's going on where, and have a consistent and sustained flow of information between all parties.

And remember, it's not just the obligation of the intermediary. This reporting obligation could shift to your company. Proper governance can limit the chances of scrutiny.

Seek a partner to help keep you compliant across Europe - and beyond

The EU-wide nature of the Directive does not mean there is one approach common to all EU countries. Every EU member state must transpose the Directive into local law, and will have their own interpretations - some may even go further; Poland extends the scope to domestic situations and brought application forward to 1 January 2019. Organisations with a complex reporting matrix operating across multiple EU countries should especially be monitoring this process.

This is where an international frim, such as TMF Group, with local regulatory and compliance knowledge and the right geographical spread can help keep you on track. Working with the same business partner across EU jurisdictions can help to manage the information accuracy and consistency across the whole chain and deliver the right governance framework for your business.

You don't have to do it alone; governance and compliance is what TMF Group does best. Consider us your bridge between operating and reporting, working across our network in more than 80 countries worldwide.

Our experts stay on top of global and local regulatory developments and can help ensure a company is compliant wherever it operates.

Get in touch to learn more about how TMF Group can keep your business running in the EU and beyond.

Discover how we help our global clients adapt to local rules and regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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