BEPS Action 12: Mandatory disclosure rules Response by the Chartered Institute of Taxation

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1 BEPS Action 12: Mandatory disclosure rules Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) is pleased to respond to the Public discussion draft published on 31 March 2015 on BEPS Action 12: Mandatory disclosure rules (Discussion Draft). 1.2 The UK Disclosure of Tax Avoidance Schemes (DOTAS) regime has been successful as one element in a strategy to reduce abusive tax avoidance schemes from the UK. The regime works best in identifying mass marketed pre-packaged schemes. However, the rules impose a compliance burden for promoters and for companies with in-house tax departments, whose commercial affairs happen to need tax advice. Significant work may be needed by in-house teams to confirm whether a disclosure has to be made. The Discussion Draft is right to identify balancing additional compliance cost with the benefits obtained by the tax administration as a design principle. 1.3 In this regard the additional information which will be available to tax administrations, as a result of other BEPS actions (e.g. Country by country reporting) and generally as transparency with regard to tax increases globally (e.g. Tax Information Exchange Agreements), should be considered when considering what other information would be useful to tax administrations to respond to tax risks posed by tax planning schemes. 1.4 International mandatory disclosure rules should be aimed at artificial and abusive schemes, categorised by hallmarks similar to those in the UK DOTAS regime. This means the rules would not capture the types of international tax planning tools that have been identified as issues which are being looked at by other BEPS actions, for example hybrid mismatch arrangements. It would be very difficult to devise hallmarks which meet the principle of being clear and easy to understand and that would capture tax planning tools which take advantage of mismatches in tax regimes, but could not be regarded as abusive or aggressive in any single territory. We suggest, it would be a mistake to attempt this. Since these types of planning are being addressed by other

2 parts of the BEPS project, it is not necessary for them to also be addressed by mandatory disclosure rules. 2 Section II. Overview of Mandatory Disclosure 2.1 The Discussion Draft sets out some key design principles which it suggests should be reflected in mandatory disclosure rules. We agree with these principles. 2.2 (i) Mandatory disclosure rules should be clear and easy to understand 2.3 Clarity will be particularly important in relation to determining what is required to be disclosed. Any generic or specific hallmarks must be very clearly described. Tax administrations should also ensure that they provide meaningful examples of the types of transactions that fall within each hallmark. 2.4 Clarity could be further improved by tax administrations providing examples of what is not required to be reported, that is what is considered to be ordinary tax planning. Detailed guidance (including examples) should be prepared by tax administrations outlining the types of transactions that are considered routine and not subject to disclosure rules. These examples and guidance should be prepared in consultation with taxpayers and advisers and should be made available prior to mandatory disclosure rules coming into effect. 2.5 Ongoing publication of reporting information by tax administrations will also be important. The publication of details of the type of schemes which have been disclosed by taxpayers would help to provide clarity for all taxpayers. 2.6 (ii) Mandatory disclosure rules should balance additional compliance costs to taxpayers with the benefits obtained by the tax administration 2.7 Countries should be encouraged to engage in consultation with taxpayers and tax advisers prior to introducing any mandatory disclosure rules. The introduction of mandatory disclosure rules imposes a significant administrative burden on tax advisers (e.g. providing training to all staff on the details of the regime and developing procedures to ensure that any potential disclosure requirements are addressed). Such consultation is important to ensure that final legislation is appropriate for the jurisdiction and for promoters and taxpayers to be in a position to comply with the rules from the outset. 2.8 Consultation on any subsequent changes to a disclosure regime will also be vitally important. Any changes to a disclosure regime will impose an additional compliance burden on tax professionals (e.g. to update procedures and provide training to all staff). Further, the consequences (both financial and reputational) of failing to make a disclosure can be severe for tax advisers and as such adequate time should be given for any changes to a disclosure regime to be properly considered by taxpayers and their advisers before they are introduced. 2.9 The rules adopted by any country should reflect the compliance environment in that jurisdiction. For example, we note that the Discussion Draft does not make any recommendation as to whether a main benefit threshold should be included in mandatory disclosure rules. The absence of a main benefit threshold in a regime might cause particular difficulties for countries where there is an established General Anti-Avoidance Rule (GAAR) which has a similar requirement. We make some further comments on thresholds below. P/tech/subsfinal/IT/2015 2

3 2.10 Consideration should also be given to the need for transitional arrangements and grandfathering provisions to address schemes that are already in place that may be reportable under new mandatory disclosure rules. 3 III. Options for a model mandatory disclosure rule 3.1 The discussion document recognises that disclosure does not necessarily imply aggressive avoidance, but in practice there are negative consequences in the UK and some other jurisdictions of transactions being reported. In the UK reputational, taxation and commercial consequences include Accelerated Payment Notices, issues for companies seeking Government contracts and the High Risk Promoter regime. These consequences ought to be carefully examined - it is vital that the regime should only apply to its intended targets, and that taxpayers do not face negative consequences as a result of badly targeted hallmarks. 3.2 A. Who has to report 3.3 We suggest that the obligation to report should only ever rest with one party. We are of the view that the primary obligation to disclose should rest on the promoter. Where the promoter has disclosed a scheme, the taxpayer s obligation should be limited to including the scheme reference number in its return. A dual reporting regime would give rise to significantly greater costs for the tax administrations, taxpayers and promoters. 3.4 The suggestion that dual disclosure reduces the risk of inadequate disclosure because, both sets of information can be checked against one another (paragraph 73) is not convincing as, in practice, the information provided by the taxpayer will generally be prepared by the promoter as well. 3.5 We accept that there are circumstances where the taxpayer would be placed under an obligation to disclosure: where there is no promoter, the promoter is offshore or the promoter has legal professional privilege. 3.6 The Discussion Draft suggests a period of 30 to 45 days for disclosure. These seem to be sensible time frames. We suggest that very early identification (e.g. within 5 days) of new schemes is not as relevant in cross-border situations as it is in relation to domestic situations when the law can more easily and quickly be changed. 3.7 B. What has to be reported 3.8 We do not agree that a threshold test cannot sit alongside a de minimis test. We suggest that countries should be free to include either or both of these tests to narrow the ambit of mandatory disclosure rules and ensure that the rules are properly and better targeted. Including these tests would also reduce the compliance burden of all involved. 3.9 We do not agree with the suggestion in the Discussion Draft that a de minimis threshold could imply that tax avoidance in small amounts was acceptable. As stated in the Discussion Draft, mandatory disclosure rules are intended to ensure the provision of timely and relevant information regarding tax schemes; they are not concerned with the legality or acceptance of arrangements. Mandatory disclosure regimes are not meant to advance or replace tax returns, but are intended to be an exceptional measure to limit severe damage to state revenue. Such damage does not arise from minimal tax savings. P/tech/subsfinal/IT/2015 3

4 3.10 C. Hallmarks 3.11 A key aspect of the model mandatory disclosure rules is that both generic and specific hallmarks must be very clearly described in order to avoid uncertainties arising in practice With regard to a generic hallmark around contingency/premium fees, mandatory disclosure rules should not seek to discourage tax advisers from charging fees that reflect the quality of advice given and the value of the matter. Therefore the mere amount of a fee, without any contingency element, should never give rise to a disclosure obligation Similarly, mandatory disclosure rules should not discourage tax advisers from offering good services to their client. This may include contractual protections such that a tax adviser commits himself to argue the case before a tax administration, without extra charge, if the tax administration does not agree with a tax return or proposed arrangement. This may include administrative proceedings or even litigation. This case should be distinguished from a contingency fee or a money-back guarantee. We suggest that contractual protections should not give rise to a disclosure obligation where they might entail extra work for the tax adviser, but without affecting the amount of fees the client has to pay for the advice D. When information is reported 3.15 We agree that the trigger for disclosure by a promoter should be the making available of a scheme, as a promoter may not necessarily know the date of the implementation We also agree that the making available requires both (1) the putting in place of all the necessary elements for the implementation of the scheme and (2) the communication to the client that the client may consider entering into transactions. This should be clear in any mandatory disclosure rules. Mere preliminary or preparatory communication should not trigger an obligation to disclose. 4 IV. International Tax Schemes 4.1 The Discussion Draft acknowledges that there are differences between domestic and international schemes and that this makes international schemes more difficult to tackle. However, the Discussion Draft does not adequately recognise the very real difficulties which will arise in practice in both defining reportable schemes and identifying who should report it. 4.2 The draft provides that promoters, advisers and other intermediaries would be expected to provide information within their knowledge, possession or control. It is suggested that an intermediary might be identified as the primary reporter or having an equal obligation with the taxpayer. Such a requirement would raise particular difficulties in relation to international tax arrangements where the description of a reportable arrangement is outcome focused. Also, international transactions often develop by the interaction of different group members based in a number of jurisdictions. Such a scenario entails a number of different advisors potentially also being involved. So at the start of a transaction no single person is aware of the whole arrangements thus making disclosure rules very difficult to apply in such circumstances. 4.3 Therefore the expectation that promoters will be aware of the full consequences of tax planning within multinational groups is misplaced. It is very unlikely to be the case in P/tech/subsfinal/IT/2015 4

5 the common and mainstream situations of international tax advice where several advisers have been involved in bespoke tax planning for a group on its commercial affairs. Frequently there will be a mixture of firms of accountants, lawyers and other intermediaries involved, each responsible for only part of the transaction; even separate firms within the same network of firms. 4.4 With regards to taxpayers with cross border arrangements while the Discussion Draft identifies that a taxpayer may play only a minor part in an arrangement, it assumes that such a taxpayer will be sufficiently aware of the material tax consequences for any one of the parties to the transaction. The draft provides that such a taxpayer needs to identify the parties that would need to disclose, placing it under an obligation to obtain details from other group members, but to a level which is rather unclear. 4.5 We assume that mandatory disclosure rules would only require one disclosure in one territory for a particular scheme, rather than multiple reporting to multiple tax authorities? 4.6 The Discussion Document suggests that reporting will be required of key provisions of foreign law relevant to the elements of the disclosed transaction. However, in making this disclosure advisers (or taxpayers) will be wholly reliant on information given from advisers in those overseas territories - they will not, even in the largest firms, have the expertise to verify whether that analysis is complete or accurate. 4.7 Additionally, the Discussion Draft suggests that there should not be any main benefit threshold on the disclosure of international tax schemes. In our view the absence of appropriate thresholds for international schemes would lead to the over-reporting of non-abusive tax advice. This would result in a high compliance cost for both tax advisers and tax administrations. If too many disclosures are made of routine tax planning advice tax administrations will not be in a position to adequately identify where genuine concerns arise. 4.8 There may also be issues arising from international tax schemes in that two countries even with identical mandatory disclosure rules may well interpret them differently. P/tech/subsfinal/IT/2015 5

6 5 The Chartered Institute of Taxation 5.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 30 April 2015 P/tech/subsfinal/IT/2015 6