With the latest amendment of Directive 2011/16, regarding the mandatory automatic exchange of information in the field of taxation, through Directive 2018/822, which was adopted on 25 May 2018, the EU Council introduces the obligation of intermediaries to report to the tax authorities any cross-border arrangement which they have been involved into, under the capacity of designing, marketing, organizing or otherwise making it available or managing its implementation or by advising or assisting the taxpayer with respect to any of the above, to the extent such an arrangement contains any of the characteristics of a potential risk of tax avoidance set out in the annex of the new directive.

However, although the annex is supposed to help intermediaries and taxpayers understand whether any of the cross-border transactions is reportable, it falls short of addressing the self-fulfilling prophesies caused by its wording, thereby increasing the tax controversy risk: In the preamble of the directive it is properly recognized that since the direct taxation remains within the competence of Member States, the reportable, as potentially tax aggressive, transactions may encompass, in addition to arrangements contravening the EU-wide general tax anti-abuse rule, situations where the corporate tax rate is zero or almost zero. By contrast, the annex states that when the deductible cross-border payment is made to an associated enterprise, which benefits from a preferential tax regime (for example, I could think of a preferential R&D regime), then, when one of the main benefits (note: not only the prevailing one) is the obtaining of a tax advantage, the transaction is reportable. In that sense the limitation provided, namely that the presence of tax preferential regime conditions in the jurisdiction of the recipient of the payment cannot alone be a reason for concluding that the arrangement has as one of the main benefits the obtaining of a tax advantage, does not help much in drawing the line between legitimate, and as such not reportable, transactions with favorable tax jurisdictions and not legitimate ones.

Other cross-border transactions that are unconditionally reportable include arrangements undermining the application of the rules pertaining to the automatic exchange of Financial Account information (i.e. the Common Reporting Standard related rules), the use of non-transparent beneficial ownership chain structures, hard-to-value intangible asset transfers between related parties and business restructurings involving the cross-border transfer of functions, risks or intangibles, when the projected EBIT of the transferor during the three-year period following the business restructuring are less than 50% of the projected EBIT in the absence of the restructuring.

Furthermore, also included in the annex are the design, etc. of arrangements for which the fee payment to the intermediary is contingent on the generation of a tax advantage from the arrangement, arrangements containing confidentiality clauses and having as one of the main benefits the obtaining of a tax advantage, structures for the exploitation of another entity’s losses or the re-classification of income into capital for lowering the tax burden, circular transactions etc.

The obligation to report applies to every intermediary. However, the directive recognizes the importance of the legal professional privilege enshrined in national law and provides the possibility for a waiver from the reporting obligation as long as the intermediary concerned enjoys legal professional privilege. In such cases the intermediary can still be obliged, according to the directive, to notify other intermediaries involved in the structure or, if no other intermediaries are involved, the relevant taxpayer, about their obligation to report the transaction.

The obligation to report the reportable cross-border transaction to the tax authority is due within 30 days beginning on the day after the relevant arrangement is made available/is ready for implementation or the first step in its implementation has been made (whichever occurs first). For intermediaries providing advice or assistance, the reporting obligation must be fulfilled within 30 days after that event.

The obligation to report applies also to reportable cross-border arrangements the first step of which is implemented after the date of entry into force of this directive (i.e the 25th of June 2018). Such arrangements that will be implemented between 25 of June 2018 and 1 July 2020 (date of its application), are due for reporting by 31 August 2020.

In view of this development, consultants and taxpayers should carefully review cross-border transactions which are put in place after 24 June 2018 to determine whether they trigger any related reporting obligation to the tax authorities after July 2020.

According to the directive, failure to comply with the reporting obligation should be sanctioned by the Member States with effective, proportionate and dissuasive penalties.