The EU Council Directive (known as the DAC 6 Directive) on EU-wide reporting obligations for certain cross-border tax arrangements was adopted in March 2018. One of its aims is to create more transparency and provide information so that tax authorities can take action against aggressive tax arrangements in good time. The individual member states have until 31 December 2019 to transpose the directive into national law. On 21 June 2018, the finance ministers of the federal states of Schleswig-Holstein and Rhineland-Palatinate, as part of a working group without the involvement of the BMF, adopted a draft text for an "Act on the Introduction of an Obligation to Report Tax Arrangements" ("Section 138d AO-E"), which not only provides for the notification of international tax arrangements, but also subjects certain purely national tax arrangements to a notification obligation and thus goes beyond the requirements of the Directive. The draft of Section 138d AO will be discussed in the joint federal-state working group in connection with the implementation of the Directive. It can be assumed that it will be included in a draft bill to be submitted by the BMF. For this reason, the main features of section 138d AO-E are presented below and subjected to an initial analysis.
Notifier
According to Section 138d AO-E, the primary obligation to report is to be imposed on anyone who, as a Intermediary becomes active. An intermediary is anyone who markets a tax arrangement (see below), makes it available for use, designs it for others, organises it or supports the implementation of a tax arrangement. This means that not only tax advisors, but also lawyers, bankers or other advisors may be subject to reporting requirements.
For example, the intermediary is deemed to be acting if the tax arrangement (1) is passed on to the taxpayer either in return for a fee or another economic benefit, (2) the tax arrangements are also advertised to persons with whom there is no long-term business relationship, (3) the fee for the tax arrangement is calculated at least in part according to the expected tax benefit or (4) the taxpayer undertakes to keep the tax arrangement confidential.
Notification by the taxable person and exceptions
In order to be able to recognise tax arrangements by group tax departments, family offices or foreign intermediaries, the following are also required Taxable persons who wish to utilise tax structuring.
Even if the requirements for a reportable arrangement are met, some exceptions are provided for the taxpayer in order to subject only "top earners" to the reporting obligation, according to the explanatory memorandum to the draft bill. Taxpayers are not obliged to report if (1) their total positive income in two of the three years preceding the decision to use the tax arrangement is less than €500,000.00, (2) a registration number has been submitted (including a previous report by the intermediary, see above) or (3) an application for binding information has been submitted in this context.
Notifiable arrangements
In the draft text, the notifiable design is defined with the help of three components in order to present clearly definable and significant cases. The components include an abstract definition, positive examples of rules with specific characteristics and negative examples of rules with reasons for exclusion. To assess a reportable arrangement, all three components must be considered as a whole. Reportable arrangements can arise from all tax areas (income, substance and transaction taxes).
The draft bill defines any transaction that combines statutory regulations and realises facts in a planned manner and has as its objective either (1) the reduction of the German tax claim, including taxes levied by way of deduction, or (2) the postponement of the accrual of such tax claims to other tax jurisdictions or taxable dates, or (3) claims from tax credits or tax refunds, as Tax structuring.
The Positive control games are formulated abstractly, as they must relate to future tax arrangements that have not yet been realised. They are based on the characteristics of past tax arrangements, such as "double dip", "cum/cum", "Goldfinger" or "bond stripping". Accordingly, tax structuring generally exists if tax-reducing facts are to be allocated to several taxpayers, several times to the same taxpayer or to another taxpayer. Tax structuring also exists if the transaction is intended to cause fluctuations in profits and losses with opposing tax rate effects, if a different allocation of total costs is to be made when transferring equivalent assets or if the transaction is to be carried out with companies that do not carry out any economic activity. In addition, circular transactions and conversions of income into capital, gifts or other low-taxed or tax-exempt types of income must be reported.
As a rule, there is no tax structuring (grounds for exclusion) if (1) it is either tailored to the taxpayer's specific circumstances so that there is no transferability, (2) it is already demonstrably known, (3) it is designed by natural persons without auxiliary staff for their own purposes, (4) it must already be reported under other regulations (e.g. Section 36a (4) EStG) or (5) the cash value of the tax benefit does not exceed a total of €50,000 in individual cases.
According to the explanatory memorandum, the abstract definition of acting as an intermediary and tax structuring with subsequent examples of rules is intended to make it possible to differentiate this from "normal" tax structuring in order to exclude it from the reporting obligation.
Procedure
The notification must be submitted to the Federal Central Tax Office within 30 days of the occurrence of the notifiable event in accordance with the officially prescribed data set. The Notifiable event can arise either from the intermediary acting for the first time or from the taxpayer's recognisable decision to use tax planning.
For each tax arrangement reported, a Registration number which the intermediary must pass on to the taxpayer using it. If the taxable person holds the registration number, he is not obliged to report the tax arrangement.
The intermediary must also submit semi-annual follow-up reports in the year of notification and in the following three years, each by 10 July, stating the number of tax arrangements marketed, designed or implemented.
The tax planning must be described in abstract terms in the notification so that it can be understood in terms of content and tax law. The resulting tax effects must be presented. If the notification is made by an intermediary, it is not necessary to name the taxpayer, as no conclusions can be drawn about the taxation procedure. As a result, the tax authorities do not provide any feedback to the taxpayer as to whether an arrangement is to be assumed. The notification procedure is therefore not binding in the same way as, for example, the binding information.
Planned internal administrative procedure
After an initial assessment of the reportable arrangement, the Federal Central Tax Office sends the notification to representatives of the Federal Ministry of Finance and the highest tax authorities (known as the Task Force). The task force examines whether the arrangement is undesirable or whether it can be recognised. It also analyses whether there is a need for legal changes. Regular reports are submitted to the Finance Committee of the Bundestag.
Sanctions
Failure to report reportable tax arrangements is an administrative offence that can be punished with a fine of up to €100,000.00. If the intermediary breaches its duty of disclosure, a minimum fine of € 200 per day the deadline is exceeded.
Temporal application
Reportable tax arrangements must be reported after the Amendment Act comes into force, provided that the reportable event occurs after the Amendment Act comes into force. In the transitional period of the first six months, simplifications are provided for with regard to subsequent notifications.
Outlook and appreciation
The draft bill (Section 138d AO-E) stipulates that purely national tax arrangements must also be reported. However, a "flood of notifications" to the Federal Central Tax Office is not to be expected, as the positive and negative examples and the exceptions mean that the scope of application is expected to be narrow. In addition, "normal" tax arrangements are usually explicitly tailored to individual specific circumstances and therefore not transferable to a large number of cases, which means that there is no reporting obligation, which is generally to be welcomed from the perspective of advisory practice.
Nevertheless, it should not be overlooked that the DAC 6 Directive only provides for a reporting obligation for international and income tax arrangements. Even if the legislator's desire for early knowledge of unforeseeable effects of tax laws is understandable, a national notification obligation represents a disproportionate burden, even with a narrow scope of application.
Furthermore, it does not appear appropriate to primarily subject the intermediary to the duty of disclosure if the intermediary is subject to the duty of confidentiality. Rather, in such cases, the Directive should provide for an exclusive duty of disclosure by the taxpayer. The intermediary fulfils its duty of disclosure by drawing the taxpayer's attention to any existing duty of disclosure.
Furthermore, a reporting obligation on the part of the intermediary or the taxpayer should also entail a short-term response obligation on the part of the tax authorities in order to create a certain degree of planning security for the taxpayer. A proper evaluation of the reports received requires a prompt response from the tax authorities anyway, so that the structure of Section 138d AO-E as a cooperation model seems appropriate.
Whether this new draft law is suitable for ensuring uniformity of taxation by curbing inappropriate tax arrangements at an early stage remains to be seen in practice. A more direct implementation of the directive by the legislator would be desirable. Taxpayers and their advisors should familiarise themselves with the new framework conditions at an early stage and comply with any reporting obligations. Your TAXGATE team will support you in tax planning in terms of legal and sustainable structures.
Event information: The draft of § 138d AO will be the subject of a lecture by Dr Thomas Elser at the TAXGATE Academy on 24 September 2018.
Tatjana Scheufler is a tax consultant at TAXGATE, a law firm specialising in transactions, investments and tax compliance.
