The ring of International Financial Centers circling Europe, extending from the Crown Dependencies of the Isle of Man, Guernsey and Jersey through to Gibraltar, Malta and Cyprus in the Mediterranean have or are due to enact quite different Mandatory Disclosure Rules for CRS Avoidance Arrangements.
The Crown Dependencies intend to adopt the OECD MDR approach, the Mediterranean Centers will adopt the EU DAC 6 approach.
For service providers with offices spread across each camp this will prove challenging as two separate compliance and risk management frameworks will need to be developed and complied with.
The DAC 6 approach to Mandatory Disclosure is broader than the OECD equivalent. Under DAC 6, cross-border arrangements are reportable if they indicate a “potential risk” of CRS avoidance. The supporting Generic Hallmark is satisfied if the arrangement “may have the effect of undermining” reporting obligations. Therefore, arrangements that simply result in non-reporting under the CRS will be in-scope, indeed arrangements that “may have” a non-reporting outcome will also be in-scope. There is no requirement to determine the intention or otherwise of the relevant intermediary (“Promoter” under the OECD version).
DAC 6 does however contain two limiting provisions: (i) intermediaries that provide “aid, assistance or advice” (“Service Providers” under the OECD version) may apply a qualified objective test to what they “could be reasonably expected to know” given the facts and circumstances and their relevant expertise. This is similar to the OECD test for Service Providers, and (ii) intermediaries need only file information that is within their “knowledge, possession or control”.
The initial draft of the OECD MDRs adopted a similar approach, in that a CRS Avoidance Arrangement could be made out “… where it is reasonable to conclude that it …. has the effect of, circumventing CRS Legislation …”. This was widely criticized in responses to the Consultation, eventually persuading the OECD to include limiting provisions, as follows:
“… an Arrangement is not considered to have the effect of circumventing CRS Legislation solely because it results in non-reporting under the relevant CRS Legislation, provided that it is reasonable to conclude that such non-reporting does not undermine the policy intent of such CRS Legislation.”
The scope of what constitutes the “policy intent” of the CRS is not explained to any great extent; perhaps implementing jurisdictions or indeed the OECD may take the opportunity to confirm that taxpayers are not under a positive duty to organize their affairs to maximize the scope of reporting under the CRS?
Whatever the scope of the “policy intent” limitation, no such express equivalent is contained in the DAC 6 version; implementing jurisdictions may however seek to align the scope of the DAC 6 test to that of the OECD, by perhaps interpreting the DAC 6 “may have the effect of undermining” reporting obligations in a similar way to the “undermining the policy intent” test under the OECD version.
The DAC 6 test for reporting “intermediary” is also wider than the OECD equivalent. The OECD version separates intermediaries into two: (i) Promoters, and (ii) Service Providers. Promoters are persons responsible for the design and marketing of an Avoidance Arrangement; Service Providers provide “Relevant Services” in respect of an Avoidance Arrangement. Broadly therefore the OECD version makes a distinction between acts preparatory to an Avoidance Arrangement (design and marketing) and acts related to its implementation: Relevant Services provided by a Service Provider.
The DAC 6 equivalent blends this distinction, in providing that an “intermediary” means:
“… any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement.”
Organizing or Managing the Implementation of a cross-border arrangement would suggest actions that are not merely preparatory (viz “design” and “marketing”). This matters, because as mentioned above, the qualified objective test of “knows or could reasonably be expected to know” only applies to intermediaries that aid, assist or advise in relation to the implementation of an arrangement, not to intermediaries that actually manage implementation of the arrangement.
Actions that lead to a disclosure obligation are also broader under DAC 6 than the OECD equivalent. Disclosure under the OECD version is tied to the date on which a Promoter makes the CRS Avoidance Arrangement available for implementation (broadly the date on which the arrangement is communicated to the Client) or the date on which Relevant Services are first provided in the case of a Service Provider. The DAC 6 requirement is met where a cross-border arrangement “is ready for implementation” which obviously can be earlier than the date on which the arrangement is communicated to a Client and may also be wide enough to capture situations where an arrangement is designed in-house.
DAC 6 also contains a number of provisions that require continuing reporting obligations that do not have similar expression in the OECD version. With respect to “marketable arrangements” (broadly, cross-border arrangements that do not require substantial customization) an intermediary is required to file a report every three (3) months updating use of the arrangement, and with respect to relevant taxpayers, Member States may require a yearly report with respect to use of the arrangement.
The OECD MDRs includes a significant retro-active period in respect of Promoters of CRS Avoidance Arrangements that occurred on or after 29th October 2014, though limited to high value accounts (over 1 million dollars) and subject to an actual knowledge test on the part of the Promoter. The provisions do not apply to Service Providers. In the case of DAC 6, there is a limited retro-active period to 25thJune 2018, but without a high value account exemption, with reports required to be filed by both intermediaries (including “Service Providers”) as well as relevant tax payers where the first step of implementation of a cross-border arrangement occurred after 25th June 2018.
DAC 6 therefore presents in-scope professional service providers with a wide and pervasive disclosure regime, backed by criminal sanctions. It is a fair criticism of the rules, as currently drafted, that they will capture more information than is necessary and that in-scope professional intermediaries will struggle to implement coherent and easy to follow compliance guidelines. A broader concern is the eventual adoption of the MDRs by countries outside of the EU and the data protection risks that will then ensue if EU countries exchange data according to DAC 6 and receive data according to the OECD version, a clear disparity will occur as inevitably more data will be exchanged than will be received.