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taxation
The European Mandatory Disclosure Regime A New Reality for Cypriot Intermediaries, Another Burden on Cypriot Taxpayers?
By Stavros Karamitros, Senior Tax Adviser, International Tax Services, EY Cyprus
M
andatory disclosure rules are nothing for European Union Member States (EU MS). In fact, with the United Kingdom leading the race (from 2004), Ireland (in 2008) and then Portugal (in 2011) were the first and only EU MS to introduce mandatory disclosure rules in their local legislation. However, despite their success in combating aggressive tax planning schemes in advance, especially in the United Kingdom, such rules had differences between them, particularly in terms of design, thus resulting in diverging effects. The aforementioned divergences, along with the need to strengthen certain tax transparency aspects of the existing taxation framework set out by Council Directive 2011/16/EU (DAC1), were the main reasons that led the EU Commission to the Directive Proposal for the sixth amendment of the framework regarding mandatory automatic exchange of information on reportable cross-border arrangements. Considering the above, on 25 May 2018, the Council of the EU formally adopted Directive 2018/822/EU (EU MDR Directive or DAC6) amending DAC1 with the introduction of an EU mandatory disclosure regime (EU MDR) providing for the filing of information related to reportable cross-border arrangements with the tax authorities of the EU MS and for the subsequent automatic exchange of
ACCOUNTANCY CYPRUS
such information among the EU MS. The EU MS should transpose the Directive into their domestic legislation by 31 December 2019, whereas the Directive will apply from 1 July 2020. The EU MDR goes beyond the recommendations of Action 12 of the Base Erosion and Profit Shifting (BEPS) Project of the Organisation for Economic Co-operation and Development (OECD)/G20 of 2015 by prescribing a wider range of hallmarks and introducing the automatic exchange of information on reportable cross-border arrangements among the EU MS. The objective is to enable the tax authorities in the EU MS to take early action regarding potentially aggressive tax arrangements, in order to better target their audits or amend their legislation. This could also
The Directive is the first to place the reporting obligation on all actors of aggressive tax planning, tax avoidance, evasion and abuse
act as a deterrent for the promoters and users of aggressive tax planning schemes. All taxes except VAT, customs duties, excise duties and compulsory social security contributions are included in the scope of EU MDR, while all arrangements must also present a crossborder element, i.e. to concern either more than one EU MS or an EU MS and a third country and satisfy an additional set of conditions. Intermediaries which meet certain EU-nexus criteria are required to disclose to the national tax authorities certain cross-border arrangements which contain one or more of a prescribed list of hallmarks (referred to as “reportable cross-border arrangements”). For some of these hallmarks, a gateway criterion needs to be met for them to apply, which is called the ‘main benefit test’ (MBT) and relates to the main tax advantage or one of the main tax advantages that a natural (i.e. an individual) or legal person (i.e. a company), having regard to all relevant facts and circumstances, may reasonably expect to derive from an arrangement. The hallmarks are divided into five thematic headlines: (i) generic hallmarks linked to the MBT, (ii) specific hallmarks linked to the MBT or (iii) related to cross-border transactions, (iv) specific hallmarks concerning automatic exchange of information and beneficial ownership and (v) transfer pricing.
