Documents considered by the Committee on 7 March 2018 Contents

5Tax avoidance and evasion: disclosure by intermediaries

Committee’s assessment

Politically important

Committee’s decision

Cleared from scrutiny; drawn to the attention of the Treasury and the Public Accounts Committees

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 + ADDs 1–3, COM(17) 335

Summary and Committee’s conclusions

5.1In response to the information on tax avoidance and evasion contained in the “Panama Papers”, the European Commission in June 2017 tabled a legislative proposal to amend the EU’s Directive on Administrative Cooperation (DAC)25 for consideration by the Member States.26 The aim of the proposal is to deter aggressive tax avoidance schemes, and to give the authorities access to the right information at an early stage to “make timely and informed decisions on how to protect their tax revenues”.

5.2The current DAC Directive already provides for mandatory automatic exchange of information between EU countries in respect of five categories of income and capital.27 Information held by each Member State’s national tax authorities are automatically shared confidentially between the EU Member States via the secure Common Communications Network (CCN).

5.3The new amendment would add a new category of information for automatic exchange, by requiring intermediaries, like tax advisors and consultants, to report potentially aggressive cross-border tax planning arrangements for an EU-based client to their national tax authority. Where the intermediary is based outside the EU and thus outside of the reach of the Directive, the disclosure obligation would shift to the taxpayer itself.

5.4The Committee first considered the proposal in November 2017, and retained it under scrutiny to clarify the Government’s position on the substance of the new Directive.28 We noted that the new legislation would likely have to be implemented in the UK under the terms of the post-Brexit transitional period, during which all EU law will continue to apply as it does at present.

5.5The Committee also sought further information on the Treasury’s assessment of the value to the UK concerning exchange of information under the DAC Directive, to ascertain whether the Government would seek continued access to information exchanged under the Directive after the post-Brexit transitional period (during which the UK would be considered a ‘Member State’ for the purposes of the Directive, and therefore retain its rights and obligations with respect to exchange of information with other EU countries on matters of direct taxation).

5.6We received an update from the Financial Secretary to the Treasury (Mel Stride) on 23 February 2018.29 He explained that the Council had reached an agreement on the legal text, making a number of changes compared to the original Commission proposal:

5.7The Ministers informs us that EU Finance Ministers are due to vote on the agreement reached at the meeting of the ECOFIN Council on 13 March.

5.8With respect to the Government’s post-Brexit access to information on UK taxpayers held by EU countries via the Common Communications Network (CCN), the Minister explained that third country access to information shared via this network is “usually reserved for EFTA members”, although others may have “limited access depending on the requirement”, which is agreed on a case-by-case basis. However, despite our request, the Minister did not flesh out the Government’s proposals for post-Brexit cooperation with the EU on tax avoidance and evasion, or share any details about the possible substance of a new UK-EU agreement that would ensure HMRC’s continued access to information on UK taxpayers held by tax authorities in the EU-27.30

5.9In view of the upcoming Council vote on the new Directive, the Minister asked the Committee to clear the document from scrutiny. As the Government has signalled its approval for the outcome of the Council’s deliberations, we are content to do so. However, we ask the Minister to share:

5.10We draw these developments to the attention of the Treasury Committee and the Public Accounts Committee.

Full details of the documents

Proposal for a Council Directive as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements: (38863), 10582/17 + ADDs 1–3, COM(17) 335.

Background

5.11Tackling 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.

5.12In 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 intermediaries like tax advisors and consultants to report potentially aggressive cross-border tax planning arrangements with which they are involved to their national tax authority. This disclosure obligation would be triggered if a tax planning structure:

5.13The 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 expected 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”. As a legislative proposal concerning taxation, the Directive must be agreed unanimously by all Member States and the European Parliament only has a consultative role.

5.14The Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the proposal in July 2017.31 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”. He 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 also wanted the ‘hallmarks’ to reflect a new OECD standard on cross-border tax arrangements, which is still in development.

5.15The Commission’s aim was for the new Directive to be implemented in all Member States by early 2019. The Member States have postponed it until 1 January 2020. This means that, if the post-Brexit transitional arrangement is agreed, the UK would be under a legal obligation to implement its provisions even after its formal withdrawal from the EU.

5.16The Committee first considered the proposal in November 2017, noting that the Government appeared to be cautiously optimistic about the potential added value of the new reporting requirements for intermediaries.32 We retained it under scrutiny to obtain further information from the Minister about both the substance of the Directive, and the implications of Brexit for UK cooperation with EU Member States on tackling tax avoidance and evasion.

5.17The Financial Secretary informed the Committee in February 2018 that the Member States had reached agreement on the text of the new Directive.33 They made a number of substantive changes to the legal text, including by refining the scope of the reporting requirement to avoid duplicate or unwanted disclosures and limiting the powers of the European Commission to change the list of “hallmarks” of aggressive tax planning arrangements at a later stage.

5.18The Government intends to support the amended legal text when it goes to Council for a formal vote on 13 March 2018, and requested the Committee clear it from scrutiny.34 We have done so, but press the Minister again for substantive detail about the Government’s view of the implications of Brexit for exchange of information with the EU on matters of direct taxation and cross-border cooperation to address avoidance and evasion.

Previous Committee Reports

First Report HC 301–i (2017–19), chapter 21 (13 November 2017).


25 Directive 2011/16/EU.

26 As a legislative proposal concerning taxation, the Directive must be agreed unanimously by all Member States and the European Parliament only has a consultative role.

27 The five categories are income from employment, director’s fees, certain life insurance products, pensions, and ownership of and income from immovable property.

28 See our Report of 13 November 2017.

29 Letter from Mel Stride to Sir William Cash (22 February 2018).

30 We have raised similar concerns about the future of administrative cooperation and exchange of information between HMRC and its European counterparts in the context of indirect taxes such as excise and VAT (given the ambition to obviate the need for VAT import controls at the Irish border), cash controls, and anti-money laundering efforts. The UK will exit the legal frameworks underpinning the exchange of data on all these topics in March 2019, or at the end of the transitional period.

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

32 See our Report of 13 November 2017.

33 Letter from Mel Stride to Sir William Cash (22 February 2018).

34 The European Parliament has adopted a non-binding opinion on the proposal, clearing the way for formal adoption of the Directive by the Council.




9 March 2018