The European Union Disclosure Directive leaves many questions unanswered, but companies can take steps now to mitigate risks.
In March 2018, the European Union (EU) adopted far-reaching tax reporting rules that took effect on 25 June. While most attention has been focused on their effect on large multinational corporations, the rules apply equally to small businesses and even to individuals who have dealings across borders.
The reach of these rules expands beyond income taxes to cover all levies except value-added tax, social security contributions, and customs and excise. The new Disclosure Directive leaves many questions unanswered, but companies can take steps now to mitigate risks.
So what does the EU want? In a nutshell: cross-border tax arrangements that meet certain criteria (hallmarks) must be reported to the tax authorities. These reports must detail the features of the arrangement, the benefits, the criteria that triggered the reporting and the identification numbers of the taxpayers.
Until July 2020, the reporting is limited to cross-border arrangements that began implementation after the directive took effect. However, this will then be expanded to “arrangements that are ready or have been made available for implementation.” And although in the first instance the reporting obligation rests on (tax) services providers, there are several exceptions where taxpayers themselves are required to report.
Now, one may ask: “What is an arrangement, and what are these hallmarks?” Here we immediately arrive at the main difficulty of applying these rules. Even though the directive requires member states to extend reporting to transactions that happen after 25 June 2018, the European countries have until December 2019 to go through their own legislative processes and develop and define the terminology that will tell us what we need to do today.
Is this effectively retroactive application possible, or even constitutional, in the various member states? But perhaps more importantly, the question arises as to the wisdom of introducing substantial reporting obligations on an entire European business community with no time to build the processes and information systems and with details of what to build still underway.
Unfortunately, the directive puts the business community in just that position. It directs EU member states to implement new legislation and leaves much of the fine-tuning and wordsmithing to the individual countries. For now, this causes significant concern for tax professionals and taxpayers alike.
Let me give a small example of the questions we are trying to answer — and my apologies for getting technical. One of the hallmarks (C2) states: “Deductions for the same depreciation on the asset are claimed in more than one jurisdiction.” Now what situations could this potentially apply to?
Branch assets outside a country of incorporation could, depending on the rules in the country of residence, have depreciation both in the branch country and in the residence country. Is this covered?
US companies, for their US tax calculations, need to consider the depreciation on all the assets in their subsidiaries. Is that intended to be covered?
In fact, some countries may have controlled foreign corporation (CFC) provisions that reduce the CFC income by the depreciation of assets in the country of the CFC. Is this intended?
Will some EU member states interpret this rule to include the depreciation on the “right-to-use asset” in IFRS 16 Lease situations?