Tax disclosure is about to become a compliance minefield. Against a backdrop of increasing corporate scrutiny and transparency worldwide, the soon-to-be-introduced Mandatory Disclosure Rules (MDR) are raising the reporting standards bar higher.
The regulations, set to come into force in the coming months across EU member states – including the UK, whatever the outcome of Brexit negotiations – will require tax-aggressive cross-border arrangements to be reported to the authorities.
These regulations will apply to any company doing business in Europe, whether it is headquartered there or not.
Further, while the onus for reporting will often fall to intermediaries, companies cannot rely on this. What constitutes an intermediary differs according to local legislation and variously includes tax advisors, lawyers, accountants, service providers, banks and other parties involved with or knowing about reportable arrangements.
Many clients still aren’t aware of the implications of this roll-out but now is the time to start preparing by gathering all relevant information.
Penalties for non-compliance are being left to the discretion of member states. The basis for assessing penalties will not be decided until formal enactment into law by individual jurisdictions. With the UK indicating fines could reach £1 million, for example, this is not something businesses can ignore.
However, more than financial penalties are at stake. With an administrative or financial offence, comes a PR problem. Further, substantial resources will be required to unravel the intricacies of cross-border arrangements; manage all relevant data; and coordinate the parties involved.
DAC6, the European Directive outlining MDR, sets out the minimum requirement that must be adopted into domestic law. Individual jurisdictions may choose to implement the requirements in different ways, extending scope as well as level of disclosure. We have already seen this in Poland, the only country to have enacted the legislation so far. Its reporting requirements include domestic arrangements and additional taxes.
There is no one standard businesses will be required to meet. Different interpretations and local variations are likely to create a quagmire of complexity.
Engaging local expertise on the ground to coordinate and gather the required information will be crucial to lightening the load. This applies particularly to multinational companies: a single point of coordination will avoid duplication of effort and the risk of things falling through the net.
While these requirements are being rolled out in the EU, multinationals based elsewhere should pay attention. All transactions that take place across EU borders will be captured by the new legislation. Over time, as we have seen with transparency standards generally, it is likely jurisdictions outside Europe will follow the lead and adopt more exacting disclosure standards.
Where does the buck stop?
Reporting relevant arrangements will fall mostly to intermediaries. However, it would be dangerous to assume it’s not your problem – what constitutes an intermediary varies from country to country. Sometimes, it will be the company itself that is required to formally disclose.
Clarifying responsibilities for submitting information to avoid duplication and over-reporting will be crucial. Companies with multiple intermediaries will need to ensure there is a clearly defined framework for information collection and, preferably, one single overarching coordinator.
Now is the time to prepare
Member states must transpose the European Directive into domestic law by 31 December 2019. Domestic MDR must come into force by 1 July 2020. Companies or intermediaries must then disclose reportable arrangements within 30 days of taking the first step towards implementation. This could be the design or utilisation of an arrangement. Defining what constitutes the first step can be complex, requiring specialist advice. Further, putting ongoing monitoring and information collection in place is essential to ensure disclosure within this short timeframe.
MDR includes a “look-back” period to 25 June 2018. Any relevant arrangements falling within the timeframe from the start of the look-back period until the date the legislation comes into force domestically must be disclosed by 31 August 2020 – or earlier if stipulated by domestic legislation.
The MDR preparation checklist
Steps you can take now to minimise the compliance and administrative burden the new rules will place on your business.
- Look over the jurisdictions in which you do business, given that you don’t have to be based in Europe for the rules to affect you.
- As the Directive begins to be transposed into local law, find out the requirements. Speak to your tax advisers and expert teams on the ground who will have a clear understanding of differences in interpretation. Remember that local law may extend MDR disclosure obligations beyond cross-border to domestic arrangements.
- Talk to your intermediaries and clarify who is responsible for deciding what information to collect and reporting. The onus is not necessarily on the intermediary.
- Put in place a system to capture all relevant information on an ongoing basis. Remember the catch-up provision – you need to look back as well as forwards.
Our global and local regulatory specialists have been keeping a keen eye on developments in this area and are well-placed to help you identify your potential responsibilities, assess the resources needed to stay compliant and coordinate the collection of relevant information.
As a trusted intermediary – or in providing transparency as a single point of contact – we can ease a potentially heavy administrative burden for companies with cross-border arrangements affected by this new obligation.
A ‘wait and see’ approach will not be enough when it comes to MDR readiness. Given the likely variation in implementation, the waters may become very muddy. With the prospect of sizeable penalties, talking to compliance experts used to dealing with emerging and changing regulation; understanding what is required; and making sure you have a plan in place will save time, money and effort further down the line.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.