Do EU tax transparency tools work?
Exchanges of tax information among member states have changed the EU tax compliance atmosphere dramatically over the past six years, as Donald Drysdale finds out.
An up-beat news release
In September, a positive news release from the European Commission reported on the apparent success of the new EU tax transparency rules which provide for the automatic exchange of information between member states.
According to the EC, administrative cooperation in tax across the European Union is helping to ensure that all taxpayers pay their fair share of the tax burden, irrespective of where they work, retire, hold a bank account and invest or do business.
Background to the Directive
Council Directive 2011/16/EU (the Directive on Administrative Cooperation or ‘the DAC’) was adopted in February 2011 and has applied since January 2013. It establishes a wide range of cooperation procedures – especially for direct taxes because they are not harmonised across member states.
Subsequent amendments to the DAC took effect on various dates up to 1 January 2018. These deal respectively with financial account information, advance cross-border rulings, advance pricing arrangements, country-by-country reports and beneficial ownership information.
In May 2018 Council Directive (EU) 2018/822 was adopted, being the sixth update to the DAC. This amendment (commonly known as ‘DAC 6’) will apply from 1 July 2020. It will impose mandatory disclosure rules on intermediaries (and in some cases taxpayers). The reports will be held in an EU database to which all member states’ tax authorities will have access.
HMRC have been consulting on draft regulations to implement DAC 6 in the UK, and ICAS has submitted a consultation response.
September’s EC news release was based on an evaluation study and subsequent report which together provided a first snapshot of the exchange of tax information under the DAC.
Evaluation study of the DAC
In April 2019 an evaluation study was submitted to the EC’s Directorate General for Taxation and Customs Union.
This study was prepared by a group of consulting firms led by Economisti Associati, supported by ECOPA and Oxford Research. Its purpose was to inform the EC’s evaluation of the DAC, including amendments to the DAC that took effect up to 1 January 2018.
The evaluation concluded that, despite the DAC’s recent implementation, it had already started contributing to member states’ capacity to fight tax frauds, evasion and avoidance – thanks to the new or improved tools for the exchange of information which it had put at their disposal.
The study found that the DAC’s potential effects on the reduction of harmful tax competition were still to materialise. However, positive net benefits were expected in the medium term, and no legislative revisions were thought necessary in the short term.
It comes as no surprise that the UK, as one of the larger members states, was identified as among the top senders and receivers of tax information. However, in terms of the financial scale of information exchanged, the reports received by the UK were ranked especially highly.
On automatic exchange of financial account information, Luxemburg originated all of the top five flows to other countries (including the UK) as well as nine of the top 10 bilateral relationships. Significant exchanges also took place between Ireland and the UK.
Automatic exchanges of information on advance cross-border rulings and advance pricing arrangements were led by the Netherlands, followed by Luxemburg, with the UK a distant third. The rankings seem to reflect the minimal use of such instruments by many countries.
The study also reports on requests for information, spontaneous exchanges of information, and trends in other forms of administrative cooperation.
It notes that fears generated by the existence of the exchange of information have encouraged offshore voluntary disclosure. Unilateral voluntary disclosure initiatives have proved more successful in France and Italy, where they were backed by additional incentives, than in the UK where they were not.
EC evaluation report
In September the EC published its own detailed evaluation of administrative cooperation under the DAC – looking at its effectiveness, efficiency, coherence, relevance and EU added-value – supported by an executive summary.
Given the tone of the EC’s news release and the organisation’s reliance on the Economisti Associati study, these additional documents seem surprisingly lukewarm.
The summary states: “There is limited evidence that the Directive has been somehow effective in improving tax authorities’ ability to fight tax fraud, evasion, and avoidance and has had some deterrent effect.”
It goes on to say: “Evidence is insufficient to allow overall conclusions on whether the intervention has contributed to the proper functioning of the internal market or to the perceived fairness of the tax system.”
On the efficiency of the DAC, it finds that evidence of quantified benefits is very limited and cannot draw a reliable and robust conclusion on this. It does acknowledge that, in a few cases, reported benefits are higher than reported costs for member states.
Comparisons of costs and benefits are complex. For example, costs relating to the automatic exchange of financial account information fall on financial institutions, and exceed ten times the costs borne by tax authorities. Other costs fall direct on taxpayers.
On a more positive note, the EC concludes that the DAC is more efficient than other international instruments in helping member states to improve tax correctness, to enhance voluntary compliance to reduce tax avoidance and evasion, and to reduce administrative burdens.
For those seeking to reduce their exposure to tax by careful structuring of cross-border transactions within Europe, or between member states and third countries, the net is tightening.
As explained above, DAC 6 will require new mandatory automatic exchange of information about reportable cross-border tax planning arrangements with effect from 1 July 2020.
These new requirements will have to be followed by intermediaries and, in some cases, taxpayers – depending upon whether the arrangements fall within the scope of the DAC and whether they involve at least one of a number of specified ‘hallmarks’.
I have seen it suggested in some quarters that hard-line Brexit supporters may include some who are desperate to ensure that the UK leaves the EU before these new reporting obligations kick in. However, this ignores the unstoppable growth in the exchange of information among tax authorities worldwide. It seems highly unlikely that, even post-Brexit, the UK would want to be seen as a tax haven.
Article supplied by Taxing Words Ltd