BEPS Action 12 - Disclosure of Aggressive Tax Planning
BEPS Action 12 aims to increase the information flow on tax risks to tax administrations and tax policy makers. Recommendations provide a modular framework that enables countries without mandatory disclosure rules to design a regime that fits their need to obtain early information on potentially aggressive or abusive tax planning schemes and their users. There however is no minimum standard provided and although the action is titled ‘Mandatory Disclosure Rules’, countries are free to choose if they implement the recommendations of the action or not.
On top of the reporting to tax administrations also recommendations are provided to improve the information exchange and co-operation between tax administrations.
The main objective is to increase transparency by providing the tax administration with early information regarding potentially aggressive or abusive tax planning schemes and to identify the promoters and users of those schemes. A second objective is deterrence as taxpayers may be frightened to enter into a scheme if it has to be disclosed.
In order to design an effective mandatory disclosure regime there needs to be an outline of who reports, what information to report, when the information has to be reported and the consequences of non-reporting.
BEPS Action 12 recommends countries to:
- Impose a disclosure obligation on both the promoter and the taxpayer or impose the primary obligation on either one of them;
- Include a mixture of generic and specific hallmarks with the existence of each of them triggering a requirement for disclosure. Generic hallmarks target features common to promoted schemes such as payment of premium fees or requirements for confidentiality. 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;
- When the obligation to disclose is with the promoter then link the timeframe for disclosure to the scheme being made available to taxpayers and link it to the implementation of the scheme when the reporting obligation is with the taxpayer;
- Introduce penalties to ensure compliance with mandatory disclosure regimes that are consistent with general domestic laws.
There are differences between domestic and cross-border schemes. Cross-border schemes are more difficult to target with mandatory disclosure regimes as the features of those schemes go beyond domestic identification hallmarks. BEPS Action 12 recommends for identification of cross-border schemes that:
- Countries develop hallmarks that focus on the type of cross-border BEPS outcomes that concerns them. A scheme would only be required to be discloses if that arrangement includes a transaction with a domestic taxpayer that has material tax consequences in the reporting country and the domestic taxpayer was aware or ought to have been aware of the cross-border outcome.
- Taxpayers that enter into intra-group transactions with material tax consequences are obliged to make reasonable enquiries as to whether the transactions form part of an arrangement that includes a cross-border outcome that is specifically identified as reportable under their home jurisdictions’ mandatory disclosure regime.
Design principles of Mandatory Disclosure Rules
Countries that choose to implement mandatory disclosure rules should in the OECD’s view consider some design principles. First mandatory disclosure rules should be clear and easy to understand. This is to make sure that the information received is of highest quality and without bias.
Second the rules should balance additional compliance costs to taxpayers with the benefits obtained by the tax administration. Taxpayers will face increased upfront compliance costs whereas tax administrations can lower their costs due to more efficient resource utilization. An offsetting benefit for taxpayers is presented as being that enquiries will be focused on areas of real concern to the tax administration.
The third principle states that mandatory disclosure rules should be effective in achieving the intended policy objectives and accurately identify relevant schemes. The information requested from taxpayers should support identification of those schemes where the tax administration is most concerned about.
As a fourth principle the information collected under the disclosure should be used effectively. Tax administration should implement effective procedures for making best use of the information disclosed by taxpayers. Otherwise there will be resistance by taxpayers in providing information in the first place.
Where mandatory disclosure regimes are in place the countries need to be able to react on the outcomes of such schemes. The information provided by taxpayers allows countries to assess the scope and use of a particular scheme they have concerns about. If there is reason to close down a scheme new legislation or regulation needs to be implemented by a country. The effectiveness of legislative changes by a country determines if a scheme is effectively closed down or that it remains open for exploiting.
Transparency and information sharing
Work under BEPS Action 5 – Harmful Tax Practices has resulted in the exchange of information in respect of rulings that could give rise to BEPS concerns. BEPS Action 13 - Transfer Pricing Documentation provides guidance for multinational enterprise to provide tax administrations with information on their global business and transfer pricing policies. Further the Joint International Tax Shelter Information and Collaboration Network (JITSIC Network) has an active commitment to spontaneously sharing information between its members. A platform provides the members with regular reports and updates on network activities. This information sharing increases the potential for interaction and multilateral collaboration between members.
Countries can have different approaches and views on BEPS concerns which may make mandatory disclosure rules subject to fragmentation when viewed from a multinational enterprise’s standpoint. However with increased information sharing between tax administrations all information is disclosed and available, certainly when countries are members of the JITSIC Network. This enables tax administrations to have an even wider view on perceived BEPS risks and may trigger them to incorporate new hallmarks in their domestic Mandatory Disclosure Rules.
As with other BEPS Actions, the success rate is depending on implementation approaches by single countries. Transparency and information sharing by tax administrations increases knowledge of best practices and BEPS risks in those countries and over time the effectiveness of Mandatory Disclosure Rules is likely to increase.