Guide: Control of arrangements subject to mandatory disclosure reporting

1 April, 2019

Blika Corporate Tax

In this article, we will share some insights regarding how multinational groups could create internal awareness of arrangements that could fall within the mandatory reporting obligations in order to help the organization identify reportable arrangements.

 

What is it all about?

The EU Council Directive 2018/882/EU (DAC 6) provides for mandatory disclosure of information to Tax Agencies by intermediaries on “potentially aggressive tax planning schemes with a cross-border element.” The Directive is based on the BEPS OECD Action 12.

The first occasion for filing is latest August 31, 2020. However, reportable arrangements must be collected now, since arrangements should be filed retroactively, starting from June 25, 2018. Any arrangement should be filed within 30 days of implementing the arrangement, starting from the first filing date. This provides a very short timeframe and frequent filing.

 

The challenge of Mandatory Disclosure Reporting

The hallmarks in the directive are worded in such a way that is difficult to determine what arrangements fall within the reporting obligations. Furthermore, domestic hallmarks need to be taken into consideration in some jurisdictions.

In the previous article, we concluded that the central tax function needs to establish a process where arrangements that could be reportable are gathered by the tax function on a current basis, irrespective of whether the reporting obligation lies with an external intermediary or a group company. Such a process includes having local reporters in different jurisdictions reporting to the central tax function if an arrangement that could fall within the filing requirements has occurred. To assess if an arrangement falls within the directive’s hallmarks, you need to be very knowledgeable in tax, something which a local manager seldom is. A solution where the local reporter can only find the local legislation and its interpretation by EU-countries will therefore not be a satisfying solution.

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The solution for DAC 6

In discussions with representatives for multinational groups, we have found that they acknowledge that they need to identify typical MDR arrangements in the group that could fall within the MDR reporting obligations and document these (“Typical MDR arrangements”).  The Typical MDR arrangements will be listed and introduced to the local reporters in order to support them in identifying arrangements that should be brought to the attention of the central tax function. Any solution used for managing the MDR compliance should therefore contain functionality that allows the group to customize the “hallmarks” in line with its business environment and specify Typical MDR arrangements.

Discussion MDR arrangements

The above implies that the central tax function should identify Typical MDR arrangements in the group. In that respect, the following should be noticed.

A group needs to identify arrangements that have been implemented (or similar) as from June 25, 2018, since these should be reported in the first reporting event in 2020. However, arrangements that have been implemented before June 25, 2018 and which are still in practice, should also be identified and documented. The reason for this is that an arrangement could be regarded as a “new” arrangement if its characteristics would change after June 25, 2018. Which type of changes that could imply that the arrangement is regarded as a “new” arrangement is not clear from the wording of the directive.

It should be mentioned that it is possible for the central tax function to identify Typical cross border arrangements with a basis in the directive, since we assume that EU-countries will implement the Directive in a fairly similar way. The problem, however, is the domestic arrangements. Even though some countries have implemented or have at least presented proposals of legislation regarding domestic arrangements, it will probably not be clear until the middle of 2020 in which countries and which types of arrangements will need to be reported locally.

The above leads us to suggest the following way forward in identifying Typical MDR arrangements for a central tax function that wants to be prepared for the MDR compliance requirements.

  1. Identify historical group arrangements that have been implemented before June 25, 2018 and which are still in force and could fall within the scope of the hallmarks of the directive.
  2. Identify arrangements which could fall within the hallmarks of the directive and are implemented (or similar) during the time period June 25, 2018 and the first reporting period in 2020. Document these and make a decision on what should be filed and who should manage the filing.
  3. The central tax function needs to identify other Typical MDR arrangements, which could fall within the scope of the hallmarks of the directive, that it assumes could take place in the group in the future.
  4. List the Typical MDR arrangements under 1-3, make an understandable description of these and ensure that the local reporters currently can:
    1. sign off of whether they have had such arrangements or not, and
    2. if yes, report them to the central tax function.
  5. With the list under 4 as a basis, make a review of the domestic hallmarks in each jurisdiction where the group conducts business. Identify Typical MDR arrangements that could be comprised of local hallmarks.

 

Read more:
Mandatory Disclosure Reporting (DAC 6) – a guide on practical challenges in your daily operations.
Mandatory Disclosure Reporting (DAC 6) – why it matters for multinationals
Guide: Implementing an MDR (DAC6) solution
Why it is important to keep control of Mandatory Disclosure (DAC 6) in-house