In this article we will share experiences from implementing a process for Mandatory disclosure-reporting.
In January 2021, the reporting of arrangements under the Mandatory Disclosure Regulations (MDR) comes into force in most EU countries (countries such as Poland, Germany, Austria and Finland have already started the reporting).
Is your company in the process of deciding how to manage these regulations? Here we present some of the challenges that our customers have faced and managed during the implementation of a process and solution for Mandatory disclosure reporting.
This article will take you through the following points:
- Establishing the process, this is what our costumers learned
- A fully decentralized process and the reason why it does not work
- Identifying arrangements and the need to keeping track of all reportable arrangements on an entity level
- Central review/decision – coordination of the filing in different jurisdictions
- Keeping track of the timing for filing with an automatic reminder
Establishing the process
In discussion with our customers we have concluded that managing reportable arrangements normally include the following steps:
- Identify arrangements – You need to have a robust process that ensures that you identify potential reportable arrangements where local managers report arrangements to the head office tax function.
- Central review – The head office tax function reviews the information reported and creates a basis for a decision on how to handle the arrangements.
- Decision making – The head office tax function decides if an arrangement is reportable and what entity should manage the reporting.
- Filing – If it is decided that filing should be done by an entity in the group, the head office tax function should manage the filing with a competent tax authority.
Does it work to have a fully decentralized process?
In many groups the responsibilities for tax is decentralized, and processes for different types of reporting are built up with limited involvement by the head tax function. Many of Blika’s clients have conclude that pushing down the responsibility of MDR-reporting is not possible. The main reason is that the head tax function needs to coordinate and manage different types of entities (internal intermediaries and taxpayers), and external intermediaries from multiple jurisdictions may be involved. If the head tax function does not take on this responsibility, the group could end up in a situation where an arrangement is reported by several reporting entities in more than one jurisdiction. The risk is that the information in each filing could differ, which could pose a risk for the group and that is something the head of tax would normally like to avoid.
Furthermore, tax functions have found that it is not reasonable to give the responsibility for assessing if an arrangement is reportable to local managers due to lack of deep tax knowledge.
The need for keeping track of all reportable arrangements on an entity level
A common theme for multinationals that Blika has worked with is that the head of tax has identified a need for control of all arrangements involving group entities. This view implies that your process should be able to include not only arrangements reported by group entities, but also arrangements reported by third party advisors.
This is important from a control perspective since the head of tax should be fully aware of any reporting where one or more group entities has been involved in an arrangement, and have the ability to ensure that an external intermediary correctly reflects the arrangement in its reporting.
Furthermore, the tax function will benefit from implementing a process and an IT solution which enables tracking of whether any reported advice has been implemented in the group. This tracking is important to assess if a supplemental disclosure regarding the arrangement should be made by the taxpayer due to changes in the arrangement that have not been included in previous disclosures.
Another process that we have seen implemented is the reporting of transactions irrespective of them being regarded as reportable or not under the MDR regulations. The thought behind this is that the tax function through the MDR reporting process creates a possibility of identifying transactions that it would like to be aware of from a tax risk management point of view. Thus, securing collection of significant local transactions which the tax function should be aware of.
How could you ensure that you identify arrangements which might be reportable?
The hallmarks in the directive are worded in such a way that it is difficult to fully understand what arrangements fall under the reporting obligations. Furthermore, there will be domestic hallmarks that need to be taken into consideration.
The main challenge facing the tax function is to continuously be informed of and gather information about potentially reportable arrangements. To assess whether an arrangement could fall under the hallmarks of the directive you need to be very knowledgeable in tax, which a local manager seldom is.
In our experience it is not possible to solve this by training the reporters in making assessments of whether a hallmark is applicable or not. Often the reporters have many other tasks to perform, and a complex MDR reporting process, which has to be made on a frequent basis, will be too time consuming and risk confusing them if they come across arrangements which are difficult to assess.
In addition, providing a detailed questionnaire which tries to catch exceptions is not likely to catch any grey areas, or will just leave the local reporter with the option of asking an expert anyhow after having spent valuable time on coming to this conclusion.
Since there are still many uncertainties it is expected that guidance will be provided by tax authorities which may result in more exceptions and complexities in the assessment process. This will require new training for reporters, and additions to your questionnaire making it even more time consuming and complex.
Instead, most groups have identified typical arrangements within the group that could be reportable and thus asked the local managers to submit these arrangements to the head office tax function for review, so they can make a decision to file or not. The typical transactions will be easy to understand and should be quick to identify and report, which is a necessity to meet the tight 30-day rolling deadline.
The list of typical transactions will be fine-tuned and tailored for the group to reflect the knowledge base built up over time. If arrangements are reported which may be exceptions, then the tax function will have deeper DAC 6 knowledge and will be in a better position to make an assessment and if need be go back to the reporter and ask for more information.
Make sure that local reporters bring arrangements to the tax departments in time
Many tax functions have, due to the 30-day rolling deadline, raised a concern that arrangements are identified in time to evaluate and file. The process we have set in place therefore includes a sign-off by reporters every 14 days, where the reporter signs off if they are aware of any arrangement that should be brought to the attention of the tax function.
Central review/decision – coordination
One of the challenges that we often deal with in an implementation, is the need for a group to coordinate the filing in different jurisdictions. An arrangement that includes parties in at least two different countries implies that filing may be needed in several jurisdictions, even though it is enough with a filing in one country. In many cases it is only the tax function that is aware of the use of intermediaries in an arrangement.
Without central coordination a subsidiary which is not aware of an intermediary might disclose an arrangement even though they are not required to. Furthermore, some countries have implemented domestic rules which require filing even though filing has been made in another EU country.
Another challenging area is the fact that an arrangement which has previously been disclosed might require a new disclosure. This could be the case if the characteristics of the arrangement has been changed after the first disclosure, or if further advice has been provided by an implementation partner (external or head office intermediary). These scenarios cannot be managed without central coordination.
Thus, many companies have acknowledged the need for a central review/decision function where the tax department decides which entity should do the filing and what should be filed.
Here it should be noted that in many situations the tax department is coordinating transactions between one or more countries, which is why its input is necessary in any filing.
Keeping track of the timing for filing
The 30-day rolling deadline for filing has prompted our customers to put in place an automatic reminder process. This function sends out automatic emails to the people responsible for a stage in the reporting workflow, to help them act in time to meet the deadline.
Blika provides a Mandatory Disclosure Reporting solution that supports multinational companies in managing the MDR reporting within the EU. If you would like to discuss your specific challenges and make sure that local reporters bring arrangements to the tax department’s attention in time, please do not hesitate to get in touch.
Mandatory Disclosure Reporting (DAC 6) – the new rules from the EU
Mandatory Disclosure Reporting (DAC 6) – a guide on practical challenges in your daily operations
Intermediaries’ challenges with Mandatory Disclosure Reporting (DAC 6)
Guide: Control of arrangements subject to mandatory disclosure reporting
Mandatory Disclosure Reporting (DAC 6) – why it matters for multinationals
A guide for implementing an MDR (DAC6) solution
Why it is important to keep control of Mandatory Disclosure (DAC-6) in-house