The European Union is proposing to impose new rules on 'intermediaries' such as private banks, tax advisory firms, accountancy firms and law firms which design and promote tax-planning schemes for their HNW clients.

Recent media leaks such as the Panama Papers have exposed ways in which some intermediaries actively help high-net-worth individuals to escape taxation, usually through complex cross-border schemes. The EU aims to tackle "aggressive tax planning" by forcing the countries within its borders to pay more attention to the previously unseen activities of tax planners and advisors. The proposals, it hopes, will eventually take the form of a directive.

Many see the EU as a 'front-runner' in the worldwide governmental crusade against tax avoidance. With this initiative, it is proposing to hold the go-betweens who create and sell tax avoidance schemes responsible for any losses to government revenues. Ultimately, it hopes that this will result in more money for the governemnts of its member-states, which in turn will contribute to its own rocketing budget.

The professionals who promote tax abuse

Cross-border tax planning schemes bear certain characteristics or 'hallmarks'; the EU now wants 'intermediaries' (this seems to be its word for tax planners) to report information to the tax authorities that will expose these 'hallmarks' before their customers use them. The European Commission (the nearest thing that the EU has to an executive branch) has identified some of these, including the use of losses to reduce tax liability, the use of special beneficial tax regimes - a clear swipe at the offshore world - and arrangements through "countries that do not meet international good governance standards."

The obligation to report a cross-border scheme bearing one or more of these hallmarks will be borne by:

• the intermediary who supplied the cross-border scheme for implementation and use by a company or an individual; and
• the individual or company receiving the advice, if the intermediary providing the cross-border scheme is not based in the EU, or if the intermediary is bound by professional privilege or "secrecy rules", a phrase that presumably refers to the Swiss bank secrecy regime and similar rules; and
• the individual or company implementing the cross-border scheme when it is developed by in-house tax consultants or lawyers.

Legislative certainty

The EU is in no doubt that its proposal will become law in every one of its countries. Europa, its press service, states: "Member-states will automatically exchange the information that they receive on the tax planning schemes through a centralised database, giving them early warning on new risks of avoidance and enabling them to take measures to block harmful arrangements. Member-states will be obliged to implement effective and dissuasive penalties for those companies that do not comply with the transparency measures, creating a powerful new deterrent for those that encourage or facilitate tax abuse. The new rules are comprehensive, covering all intermediaries, all potentially harmful schemes and all member-states. Details of every tax scheme containing one or more hallmarks will have to be reported
to the intermediary's home tax authority within five days of providing such an arrangement to a client."

New EU rules to block artificial tax arrangements, as well as new rules to make financial accounts, tax rulings and multinationals' activities more open to scrutiny by tax officials have already been finalised and are coming into force in dribs and drabs. Proposals for more onerous anti-money-laundering legislation (sometimes referred to as MLD IV), public country-by-country reporting requirements and tougher governance rules for EU funds are on the table and under negotiation. After the last public relations disaster that accompanied the publication of the EU's list of "non-co-operative tax jurisdictions," the commissioners of Brussels are racking their brains about how best to reintroduce it and want to do so before the end of the year.

The EU also expects that its proposals (which it seems to view as certainties not to be negotiated away) will oblige all its countries to enforce the "recommended mandatory disclosure provisions" in the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting (BEPS) project in a uniform way.

Information exchange on the margins

The EU has also tried to open HNWIs' financial accounts to more bureaucratic scrutiny in some of its agreements with states on its borders such as Switzerland, Liechtenstein, San Marino and Andorra. In July last year it signed a new "tax transparency agreement" with Monaco, obliging both parties to exchange information about the financial accounts of each other's residents automatically in 2018. The agreement contained a highly over-optimistic assertion about "tax evaders, who will no longer be able to hide income and assets in financial institutions abroad." It also contained an open commitment to fight tax avoidance, even though such activity is legal. Because of the deal, EU countries will receive the names, addresses, tax identification numbers and dates of birth of their residents with accounts in the Principality of Andorra, as well as information about account balances and other financial information. The agreement is fully in line with the wishes of the OECD.

Some EU countries (Ireland, Portugal and the United Kingdom) already compel intermediaries to send reports to their tax authorities. These rules have brought in disappointing amounts of extra revenue, although Europa believes them to be "very effective in clamping down on domestic tax abuse." The EU wishes to override these measures, standardise them and impose them on all its member-states.

Practical considerations

Every bank or 'intermediary' firm will have to report any cross-border tax planning arrangement that it designs or promotes to its tax authority within five days of 'giving' that arrangement to its client if it bears any of the EU's 'hallmarks.' The EU seems to be leaving it up to each country to set penalties for not doing so. The country in question must share this information automatically with all other EU states every quarter on a centralised database. There will be a standard format for the exchange of this information, which will include details about the firm itself, the tax payer(s) involved and, of course, the tax scheme. The European Commission will keep a watchful eye on the database.

The EU says that its 'hallmarks' are to be found in arrangements which:

• involve a cross-border payment to a recipient resident in a 'no-tax' country;
• involve a jurisdiction with inadequate or weakly enforced anti-money laundering laws, as judged by the EU itself;
• are set up to avoid reporting income as required under the EU's transparency rules;
• circumvent EU information exchange requirements for tax rulings;
• have a direct correlation between the fee charged by the intermediary and what the taxpayer will save in tax avoidance;
• ensure that the same asset benefits from depreciation rules in more than one country;
• enable the same income to benefit from tax relief in more than one jurisdiction;
• do not respect EU or international transfer pricing guidelines.

Which firms might have to obey the directive?

The proposal casts its net very widely, covering direct taxes of all kinds (income, corporate, capital gains, inheritance, etc.) and any company (or professional) which designs or promotes a tax-planning arrangement that has a cross-border element and contains any 'hallmarks.' Lawyers, accountants, tax and financial advisors, banks and consultants are all potential 'intermediaries.' EU law cannot be extended to cover intermediaries that are not based in the EU, so if an intermediary is not located in the EU or is bound by professional privilege or 'secrecy rules,' the obligation to report the tax arrangement passes to the EU-based taxpayer instead.

Reports in detail

Brussels hopes that the reporting requirements will impose trifling costs on firms, saying that 'intermediaries' will be able to re-use the summaries of the tax-planning arrangements that they prepare for their clients for the purpose. The proposal also respects national rules to do with professional privilege and, the EU claims, 'secrets.'

Although the new rules do not set a minimum threshold for disclosure, the hallmarks for reporting usually point to highly risky situations that involve elaborate arrangements. In noting that small companies and paupers do not normally have the resources to seek out sophisticated tax advice, it is aiming this initiative squarely at HNWs and big corporate taxpayers.

Europa, in promoting the proposals, makes an amusing observation in its literature: "the UK is one of the few member states to have such legislation for intermediaries, and yet it still has one of the highest number of intermediaries in the EU." The possibility that a disclsoure rule that costs little could force a private bank to shut down or relocate its operations to another EU country seems remote, but nowadays many EU officials spend time hoping that British businesses might move elsewhere, which probably explains the origin of the idea.

15 BEPS to Heaven

The BEPS project, finalised in October 2015, provides for 15 'actions' to equip governments with the domestic and international instruments needed to tackle the erosion of their tax bases and profit shifting for the purposes of tax avoidance. The EU proposal is fully compatible with BEPS. Unlike BEPS, it wants to ensure that countries exchange the reported information on cross-border arrangements automatically between each other. The EU is not letting its member-countries enshrine BEPS in their own laws; instead, Europa states that it is the EU (and not EU countries) that 'needs' to tailor the OECD rules to fit the needs of its 'Single Market,' a peculiar term it uses to describe the uneven patchwork of tolls, national trade barriers and immunities that characterise business (and especially financial business) within its borders.