Documents considered by the Committee on 13 November 2017 Contents

21Tax avoidance and evasion: disclosure by intermediaries

Committee’s assessment

Legally and politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Treasury Committee and the Public Accounts Committee

Document details

Proposal for a Council Directive as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.

Legal base

Article 115 TFEU; Consultation procedure; Unanimity

Department

Treasury

Document Number

(38863), 10582/17, ADD 1–3, COM(17) 335

Summary and Committee’s conclusions

21.1Tackling tax evasion and avoidance are high on the EU’s political agenda. The 2016 leak of the “Panama Papers”—a collection of documents relating to offshore entities often used for tax evasion—centred the EU’s attention on the role played by intermediaries such as law firms in facilitating the use of aggressive tax planning structures.304

21.2In response to the revelations, the European Commission in June 2017 tabled a legislative proposal to amend the Directive on Administrative Cooperation (DAC) which would require intermediaries305 to report to their national tax authority potentially aggressive cross-border tax planning arrangements306 with which they are involved. This disclosure obligation would be triggered if a tax planning structure had one or more of the “hallmarks” of facilitating tax avoidance or evasion. Any disclosures made would be shared by the receiving tax authority with all other Member States through the European Commission’s common communications network (CCN) for taxation and customs.307

21.3The overall aim of the proposal is to give tax authorities access to the right information at an early stage, allowing them to “make timely and informed decisions on how to protect their tax revenues” and prevent aggressive tax planning arrangements from being implemented. The Commission also expects the disclosure requirement to have a deterrent effect, dissuading intermediaries from designing and marketing such schemes. In the medium-term, it says, this will “increase taxes collected both in and outside the EU”.308

21.4The Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the proposal on 6 July 2017.309 The Minister was cautiously positive about the objective and contents of the new Directive, saying it “may help to address these concerns” about the purpose of certain cross-border tax arrangements, and that “there may be value in tax authorities sharing information”.

21.5The Minister also noted the Directive would need to be refined further to limit the potential for multiple disclosures relating to the same arrangement, and to ensure the list of hallmarks which would trigger the disclosure obligation are “focussed and clear”. The Government is keen for the hallmarks to reflect a new OECD standard on cross-border tax arrangements, which is still in development.

21.6The Commission’s aim is for the new Directive to be implemented in all Member States by early 2019. If that timetable is maintained, the UK would be under a legal obligations to implement its provisions prior to its planned withdrawal from the EU. The Minister has not indicated whether, and if so how, the UK will seek to maintain current flows of information between HM Revenue & Customs and other EU tax authorities, in the long-term post-Brexit. It is also unclear if the transitional arrangement proposed by the Prime Minister in September 2017 (to bridge the gap between the end of the Article 50 period and the entry into force of a new UK-EU free trade agreement) would legally require the UK to adhere to all or part of the EU acquis for its duration in any event, including the DAC and this proposed amendment.

21.7We have taken note of the Minister’s position on the proposed Directive, which is couched in conditional language. He appears to challenge the overall impact the new disclosure requirement is likely to have on tax avoidance and evasion. However, the Minister has not directly questioned the Commission’s assertion that the proposal will, in the medium term, increase tax revenues across the EU.

21.8The DAC Directive currently does not make provision for participation of a non-EU country in the system for the mandatory exchange of information between tax authorities. We therefore assume that HM Revenue & Customs will lose its access to the EU’s “common communication network” (CCN) on taxation matters on “Brexit day”, unless a legal agreement to the contrary is concluded between the UK and the EU in advance.

21.9Given that the new implementation deadline for the proposed Directive will be around the time of the UK’s expected exit from the EU, we were therefore disappointed that the Minister did not take the opportunity to assess the implications of Brexit for the UK’s participation in the DAC system. In particular, we need clarity about the Government’s objectives in this area during the Article 50 negotiations and in the context of the transitional arrangement the Prime Minister wishes to put in place by March 2019 while negotiations on the long-term UK-EU economic framework take place.

21.10We retain the proposal for a Directive under scrutiny, and ask the Minister to answer the following questions:

21.11In anticipation of the Minister’s reply, we also ask the Minister to keep us informed of progress on negotiations within the Council. We draw this proposal to the attention of the Treasury Committee and the Public Accounts Committee.

Full details of the documents:

Proposal for a COUNCIL DIRECTIVE amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements: (38863), 10582/17, COM(17) 335.

Background

21.12The EU has made addressing tax avoidance and evasion one of its top political priorities. In July 2016, EU Finance Ministers adopted the Anti-Tax Avoidance Directive, which aims to minimise corporate tax avoidance through profit shifting, artificial debt arrangements or double non-taxation.310 Separately, the European Commission and the Member States are engaged in a centralised EU listing process to identify and address third-country jurisdictions that fail to comply with international good governance standards on tax.311

21.13The EU has also adopted legislation to intensify cooperation and exchange of information between the tax authorities of different Member States. The 2011 Directive on Administrative Cooperation on tax matters (the DAC Directive)312 established rules on which details for individual taxpayers have to be exchanged mandatorily between two or more national tax authorities.313 Operationally, the information is exchanged through the common communications network (CCN), a platform managed by the European Commission for electronic transmissions between Member States relating to customs and taxation.314

21.14Since its adoption in 2011, the DAC Directive has been amended several times to establish automatic exchange of financial account information, information involving cross-border tax rulings and advance pricing arrangements, and country-by-country reporting requirements for multinational enterprise groups. The most recent amendment to the DAC was agreed in December 2016, and aims to ensure that tax authorities have access to beneficial ownership information gathered in the context of anti-money laundering activities.315

21.15Despite these efforts to intensify flows of data between national tax authorities, the European Commission has expressed concern that Member States still lack the information they need to protect their national tax base from erosion through use of sophisticated tax planning structures. These corporate structures usually involve multiple jurisdictions, shifting taxable profits towards beneficial tax regimes or reducing the taxpayer´s overall bill. Noting that some of these schemes “may not be legitimate, and in some cases, … even be illegal”, the Commission has cited research which estimates that corporate income tax revenue loss from profit shifting within the EU amounted to about €50 to 70 billion (£44 to £61 billion)316 in 2013, with the UK alone reporting tax avoidance losses of £2.7 billion in 2013–14.317

21.16In 2016, the leak of the “Panama Papers”—a collection of documents relating to over 200,000 offshore entities managed by a Panamanian law firm, which in many cases were used for tax evasion—centred the EU’s attention on the role played by intermediaries in facilitating the use of tax planning structures. In May 2016, EU Finance Ministers invited the Commission to consider a requirement for such intermediaries to disclose information on their tax planning activities to the authorities, in order to discourage them from designing and marketing tax avoidance or evasion schemes.318

The proposal to amend the DAC Directive

21.17In response to this request, the European Commission in June 2017 proposed an amendment to the DAC Directive.319 The proposed Directive would introduce an obligation for intermediaries320 with a presence in an EU Member State to report potentially aggressive cross-border tax planning arrangements321 to their national tax authority. The latter would, in turn, share this information with all other Member States. Where no liable intermediary exists, for example because it does not have a presence within the EU or because it is bound by professional secrecy laws, the disclosure obligation shifts to the individual taxpayer who makes use of the arrangement.

21.18The overall aim of the proposal is to give tax authorities access to the right information at an early stage, allowing them to “make timely and informed decisions on how to protect their tax revenues” and prevent aggressive tax planning arrangements from being implemented. The Commission also expects the disclosure requirement to have a deterrent effect, dissuading intermediaries from designing and marketing such schemes. In the medium-term, it says, this will “increase taxes collected both in and outside the EU”.322

21.19A tax arrangement would be reportable under the new Directive if it satisfies one of the hallmarks of “strong indication of tax avoidance or abuse”, which the Commission proposes to lay down in a new Annex to the DAC Directive. The Commission is also asking for the power to amend the list of hallmarks through delegated acts “in response to updated information”, which can be rejected by the Council under qualified majority voting rules.323

21.20The Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the proposal on 6 July 2017.324 The Minister is cautiously positive about the objective and contents of the new Directive, saying it “may help to address these concerns” about the purpose of certain cross-border tax arrangements. He also acknowledges that the UK is “likely to need to cooperate internationally” to tackle schemes that span multiple jurisdictions, and concludes that “there may be value in tax authorities sharing information”.

21.21The Memorandum also places the Commission proposal in the context of the UK’s domestic disclosure regimes, the Disclosure of Tax Avoidance Schemes (DOTAS) and the VAT Avoidance Disclosure Regime (VADR).325 The Minister notes that, the usefulness of these schemes notwithstanding, they do not “adequately address cross-border tax planning arrangements” in cases where it is difficult to establish in which jurisdiction a tax advantage actually occurs.

21.22The Minister also makes clear that the Government is still assessing the implications of the Commission proposal, and may seek to secure amendments to the legal text. In particular, he says:

21.23It is unclear when the Council will reach a unanimous position on the proposal, although it seems likely the Commission’s proposed entry into force in early 2019 will be delayed. The Minister does not indicate whether, and if so how, the UK will seek to maintain current flows of information between HM Revenue & Customs and other EU tax authorities, post-Brexit. It is also unclear whether the “implementation period” sought by the Prime Minister, during which—in her words—UK-EU “access to one another’s markets should continue on current terms”, would require the UK to continue applying Single Market legislation (including the DAC and any future amendments).

Previous Committee Reports

None in respect of this proposal.


304 For example, in May 2016, EU Finance Ministers invited the European Commission to “consider a requirement for such intermediaries to disclose information on their tax planning activities to the authorities, in order to discourage them from designing and marketing tax avoidance or evasion schemes”. See ECOFIN Council, “External Strategy for Effective Taxation“ (25 May 2016).

305 The proposal defines an intermediary as “any person that carries the responsibility vis-à-vis the taxpayer for designing, marketing, organising or managing the implementation of the tax aspects of a reportable cross-border arrangement, or series of such arrangements, in the course of providing services relating to taxation”. They would also have to have a presence within the EU.

306 The obligation is limited to cross-border situations, i.e. situations where a tax arrangement involves more than one Member State or a Member State and a third country.

307 The proposal amends the 2011 Directive on Administrative Cooperation on tax matters (the DAC Directive), which requires EU tax authorities to exchange certain types of information on individual taxpayers (both individuals and corporations).

308 European Commission Impact Assessment.

309 Explanatory Memorandum submitted by HM Treasury (6 July 2017).

310 Council Directive 2016/1164. Cleared from scrutiny by the previous Committee on 7 December 2016.

312 Council Directive 2011/16/EU on administrative cooperation in the field of taxation. Cleared from scrutiny on 19 November 2009.

313 For individuals, the system of “mandatory exchange” covers five non-financial categories of income and capital (income from employment; director’s fees; life insurance products not covered by other Directives; pensions, and ownership of and income from immovable property).

315 Council Directive 2016/2258. Cleared from scrutiny on 19 October 2016.

316 €1 = £0.87365 as of 4 July 2017.

317 See page 4 of the Commission’s impact assessment.

318 ECOFIN Council, “External Strategy for Effective Taxation“ (25 May 2016).

319 The full text of the proposed Directive is available here.

320 The proposal defines an intermediary as “any person that carries the responsibility vis-à-vis the taxpayer for designing, marketing, organising or managing the implementation of the tax aspects of a reportable cross-border arrangement, or series of such arrangements, in the course of providing services relating to taxation”.

321 The obligation is limited to cross-border situations, i.e. tax arrangements which involve more than one Member State or a Member State and a third country.

322 European Commission Impact Assessment.

324 Explanatory Memorandum submitted by HM Treasury (6 July 2017).

325 Similar domestic disclosure regimes are also in place in Ireland and Portugal.




20 November 2017