How should business respond to the new EU Mandatory Disclosure Regime?
November 12, 2018
We’re now a few months in to the transitional period for the new EU Mandatory Disclosure Regime. These rules kicked in on 25 June this year and broadly require businesses or their advisors to report cross border arrangements which fall within certain hallmarks to the tax authorities. So how are businesses responding to the obligations placed on them under the rules? And what are some of the challenges?
Firstly, we’re seeing that businesses are finding the lack of clarity on which transactions they (or their advisors) will be required to report a challenge. So far, the EU Directive has been released but there is not yet guidance on the meaning of many of the terms contained within the rules e.g. taxpayers are required to report “arrangements” which meet certain conditions, but we have no guidance on what constitutes an “arrangement”. In the UK, informal consultation is underway but until legislation is enacted this uncertainty remains. This becomes even trickier when you look at the picture across EU, where businesses are concerned about how they will monitor their requirements across different territories (each with their own version of the rules) to ensure compliance with local regulations.
Businesses have also been surprised by how wide the rules are in scope and that there is no "de minimis" on what needs to be reported. The rules are likely to capture a number of straightforward transactions including simplifying intra-group debt, managing their fx exposures, business reorganisations or transfers and existing financing arrangements. These may well be transactions businesses aren't seeking external advice on, meaning that the obligation is on the business to capture and report the relevant information. Businesses therefore need to work through what governance and processes they have in place to ensure that they are capturing and reporting the right information at the right time.
There are also some additional complexities for certain groups. For inbound groups, there is a responsibility for European tax teams to engage with their overseas HQs around these rules and what it will mean for them (given non EU entities are not themselves impacted) especially in terms of current and future planned projects and transactions. In the Private Equity space there is uncertainty for PE backed companies around what it will mean on exit if a report has been made, e.g. whether this will change a buyers view of the tax controls. In the mid market, groups are concerned that there are less well defined processes in place to capture relevant transactions.
So how should business respond, and what steps can be taken to manage the obligations of the new rules? Firstly, getting on the front foot; understanding which transactions may be impacted and in which territories, and establishing the processes and controls which need to be put in place to identify and report relevant transactions. Secondly, thinking about the tools and technologies they will use to collect, analyse and store the data they will need for the submissions, and what the process will be for reporting. And finally, agreeing the strategic approach the business will take to ensure consistency of reporting across territories, in particular where there might be multiple advisers who may be making submissions. My recommendation is to think about this now, some short term pain hopefully means long term gain.