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Tax
Enhanced Tax Transparency in the European Union
By Gavin Gafan Senior Manager, Tax, Deloitte Limited
It is evident that EU Member States (and indeed authorities at a global level) are improving how they communicate with each other on taxation, particularly so when it comes to curbing aggressive tax practices. The Directive on Administrative Cooperation (DAC) in the field of taxation, which has been ratified into Gibraltar’s tax legislation, aims to provide the necessary procedures and platform to enable greater cooperation with other Member States, in order to help combat tax fraud and evasion. However, in light of international tax scandals, the EU has embarked on initiatives for the mandatory disclosure of information on potentially aggressive tax planning arrangements along the lines of Action
12 of the OECD’s BEPS project. In this context, the European Parliament called for tougher measures against intermediaries who assist in arrangements that may lead to tax avoidance. The EU has issued new rules (phase 6 of the existing Directive – DAC6) set out within the EU Directive 2018/22, with the aim of obliging intermediaries to inform tax authorities of certain cross-border arrangements that could potentially be used for tax avoidance.
The provisions of DAC6 will need to be ratified into Gibraltar’s Income Tax Act by no later than 31 December 2019. These rules will require intermediaries to report to the Gibraltar Tax Authorities on any cross-border arrangement that shows at least one of the indicators (hallmarks) stipulated in the Directive. It should be noted that the definition for an intermediary is broad and should include lawyers, accountants and tax advisers, but is also expected to apply to banks, trustees, insurance companies and asset managers.
Where no EU intermediary is involved, or where an intermediary can assert legal professional privilege, the reporting obligation will fall on the taxpayer. Applicable penalties for non-compliance should apply, the severity of which should be clarified once Gibraltar’s tax legislation is updated to ratify the rules set out in the Directive.
The hallmarks outlined by the Directive are complex and require careful consideration against all business activities. There are five hallmarks (A to E), of which hallmarks under category A and B as well as points 1.2, 1.4 and 1.5 of Category C may only be taken into account if the main benefit test is fulfilled (i.e. where the main or one of the main benefits of the arrangement is to obtain a tax advantage). For avoidance of doubt, it should be noted that the main benefit test does not apply to hallmarks under category D and E as well as points 1.1 and 1.3 of Category C. That is to say, these would be taken into account irrespective of whether the
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