Improving oversight of tax advisors
One of the key actions proposed by the EU Commission vis-a-vis measures to enhance transparency and the fight against tax evasion and avoidance, is “improving oversight of tax advisors’ activities”.
Recent media leaks have revealed challenges in the international tax system, which need to be urgently tackled. The Commission is responding to these challenges as a priority, building on the far-reaching transparency initiatives it has already delivered. It is clear that a number of tax advisors and financial intermediaries have played a key role in enabling tax evasion. The Commission intends to therefore scrutinise tax advisors’ activities and create effective disincentives for professionals who promote and enable aggressive tax planning.
Measures against those enabling aggressive tax planning
In May 2016, the Council asked the Commission to consider a possible EU mandatory disclosure scheme to deter tax advisors and financial intermediaries that assist in tax evasion or avoidance schemes. The European Parliament has also called for robust EU measures against those that enable or promote aggressive tax planning. Under the BEPS project (Action 12), the OECD recommends that countries introduce mandatory disclosure requirements for aggressive tax planning schemes.
The Commission will explore the best way to increase oversight and ensure that effective deterrents apply for professionals who market and establish aggressive tax planning schemes. Examples include, Pressure is also placed on the tax avoidance market. With this frame of mind during the last quarter of 2016, the Commission will launch a public consultation to gather reactions on the most suitable approach. In conjunction, the Commission seeks to work closely with the OECD and other international partners on a potential global approach to greater transparency on advisors’ activities, even beyond Action 12’s recommendation.
Pressure placed on the tax avoidance market
The main aim of Action 12 of the OECD/ G20 BEPS project (Mandatory Disclosure Rules) is to enhance transparency by providing tax administrations with prompt information regarding potentially aggressive or abusive tax planning schemes and to pinpoint the promoters and users of those schemes.
Another objective of mandatory disclosure regimes is deterrence: taxpayers may reconsider adopting a scheme if it has to be disclosed. Pressure is also placed on the tax avoidance market as promoters and users only have a limited opportunity to implement schemes before they are closed down. One needs to remark that serial tax promoters and adopters frequently change their structures and schemes as they are aware that such schemes have a limited shelf life.
Mandatory disclosure regimes both complement and differ from other types of reporting and disclosure obligations, such as co-operative compliance programmes, in that they are specifically designed to detect tax planning schemes that exploit vulnerabilities in the tax system, while also providing tax administrations with the flexibility to choose thresholds, hallmarks and filters to target transactions of particular interest and perceived areas of risk. Quoting the OECD:
“In order to successfully design an effective mandatory disclosure regime, the following features need to be considered: who reports, what information to report, when the information has to be reported, and the consequences of non-reporting. In relation to the above design features, the Report recommends that countries introducing mandatory disclosure regimes:
- impose a disclosure obligation on both the promoter and the taxpayer, or impose the primary obligation to disclose on either the promoter or the taxpayer;
- include a mixture of specific and generic hallmarks, the existence of each of them triggering a requirement for disclosure. Generic hallmarks target features that are common to promoted schemes, such as the requirement for confidentiality or the payment of a premium fee. Specific hallmarks target particular areas of concern such as losses;
- establish a mechanism to track disclosures and link disclosures made by promoters and clients as identifying scheme users is also an essential part of any mandatory disclosure regime. Existing regimes identify these through the use of scheme reference numbers and/or by obliging the promoter to provide a list of clients. Where a country places the primary reporting obligation on a promoter, it is recommended that they also introduce scheme reference numbers and require, where domestic law allows, the production of client lists;
- link the time-frame for disclosure to the scheme being made available to taxpayers when the obligation to disclose is imposed on the promoter; link it to the implementation of the scheme when the obligation to disclose is imposed on the taxpayer;
- introduce penalties (including non-monetary penalties) to ensure compliance with mandatory disclosure regimes that are consistent with their general domestic law.”
Repercussions on the tax advisory and corporate services industry
In conclusion, jurisdictions, tax advisors, financial intermediaries and clients will need to take note of the proposals set forth by the OECD and the EU Commission, as the proposed changes could have repercussions on the tax advisory and corporate services industry. The proposals will surely create much debate as to why will a structure and/or scheme be deemed to be tax aggressive.
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About the Author
Josef Cardona joined CSB Group in July 2009. As the Director of Tax & Corporate Services, he is the first contact with all clients seeking relocation services to Malta and assists such clients with most of the services offered by CSB Group, mainly corporate, iGaming, real estate, trust and fiduciary, yacht and shipping registration and financial services