BEPS: Recommendations for a best practice tax avoidance disclosure regime

By Simon Wilks

The first in a number of papers to be released by the OECD in the next few weeks, the discussion draft published today addresses Action 12 of the OECD’s Base Erosion and Profit Shifting (BEPS) project - to develop recommendations regarding the design of tax avoidance disclosure rules. The OECD intends such rules to give tax authorities early access to information on aggressive tax arrangements, including cross-border transactions, and deter the promotion and use of such schemes.

The discussion draft is the output of the OECD’s study of a number of tax avoidance disclosure regimes, including rules in force in the UK, the US and Ireland. In looking at the effectiveness of such regimes, the OECD has paid particular attention to the UK’s Disclosure of Tax Avoidance Schemes (DOTAS) rules. In the discussion draft, the OECD quotes the UK government’s statistic that 925 of the 2,366 avoidance schemes disclosed up to 2013 under the DOTAS rules have been closed by legislation. 

The OECD, by looking at the success of tax avoidance disclosure regimes in different countries, has set out a framework for other territories to adopt, looking at the various features of such a regime such as what is reported, by who and when. The most significant step, perhaps, is the recommendation that mandatory disclosure regimes are drafted to apply to cross-border tax planning (few examples of which currently need to be disclosed under existing regimes) which, when combined with comprehensive exchange of information powers would significantly accelerate attention on cross-border planning.

The Committee on Fiscal Affairs invites interested parties to send comments on the discussion draft by Thursday 30 April 2015, ahead of a public consultation meeting in Paris on Monday 11 May 2015. 

What does this mean?

It is likely that some governments around the world will seek to adopt some form of the recommendations and the paper outlines how this might be done.  The discussion draft notes that flexibility is important so sets out options to allow territories to choose the approach that best fits their requirements.

The UK disclosure rules were designed mainly to counter 'pre-packaged' tax planning, and the rules have never worked well in the mainstream situation where bespoke advice is needed on the international tax impact on companies’ commercial activities.  International transactions often evolve through interactions between group companies based in different jurisdictions, and their advisers.  Because commercial situations can be very fluid and uncertain, often no single person is aware of the whole arrangements, particularly at the start of the transaction. The disclosure rules are very difficult to operate in such circumstances.

The discussion draft identifies that a taxpayer may play only a minor part in an arrangement - for example, a small subsidiary that doesn’t typically receive much information from its parent. However, there is an assumption that it will be sufficiently aware of the material tax consequences for any one of the parties to the transaction. In many instances it would have an obligation to find out more, but to a level which is rather unclear.

From a UK perspective, adoption of an extended disclosure requirement for cross-border transactions and the increase in use of treaty exchange of information powers by the tax authorities would be expected to lead to an increase in the number of enquiries from HMRC with the potential for an increase in the number of disputes.

Businesses and individuals need to be aware of this development which is another potentially very significant step towards increased and early transparency and not confined to local jurisdictions.

Simon Wilks

[email protected] / 0207 804 1938