Analysis of EU Tax Rulings Disclosure Directive

Excerpted from yesterday's EU Commission Memo ...

What information exchange rules are currently in place for tax rulings?

Currently, EU legislation provides for spontaneous exchange of information on tax rulings, but only in certain circumstances. These spontaneous exchange provisions require a Member State to communicate information on their tax ruling(s) to any other Member State for whom the information may be relevant.

However, this system leaves a lot of room for interpretation by the Member State issuing the tax ruling. That State decides what is "relevant" and which other Member States should receive the information. In some cases, this leeway may be deliberately exploited to avoid sharing information. In other cases, the Member State issuing the tax ruling may simply not realise that this information could be useful to another Member State, so it doesn't spontaneously exchange it. Moreover, under current rules, Member States can refuse to spontaneously exchange the information on the grounds of commercial secrecy laws or public policy.

In 2014, Member States were required, for the first time, to provide statistics to the Commission on their information exchange on tax rulings. This was required by the current Directive, which entered into force in 2013.These statistics confirmed that, in practice, very little information was being shared between tax authorities and that the spontaneous exchange of information on tax rulings has been quite ineffective.

That is why the Commission has now made it a priority to put forward clearer, more comprehensive and more stringent information exchange requirements for tax rulings.

What new transparency provisions is the Commission proposing for tax rulings?

Today's proposal would oblige Member States to automatically exchange information on their tax rulings. This means that tax authorities would have to share a pre-defined set of information on all of their advance cross-border tax rulings with all other Member States. They would do this on a quarterly basis and following a standard format. Recipient Member States would then be allowed to request more detailed information on a particular tax ruling if they believe that it is relevant to their own taxation rules.

The big improvement that would come with this automatic exchange of information on tax rulings is that there would be clear and unequivocal rules on what information Member States must share with each other and when. The fact that Member States would have to send information on their rulings at regular, set intervals will help to ensure that information exchange is applied properly and comprehensively, and that the Commission would be able to monitor the correct application of the information exchange. Moreover, Member States would not be allowed to refuse or reduce information on the grounds of commercial secrecy or public policy.

With the automatic exchange of information, every Member State would know what cross-border tax rulings apply across the EU, and would be able to assess for itself whether a tax ruling of another Member State has an impact on itself. This would make all MS much better equipped to take the necessary measures to protect their tax base and to react to aggressive tax planning.

How would the automatic exchange of information on tax rulings work in practice?

Every three months, every Member State would be obliged to report to all the other Member States on the tax rulings they have issued in that period.

This report, sent via a secure email system, would contain a pre-defined, standard set of information. The Member States receiving the information would have to confirm receipt within 7 days, to ensure that the information has reached the intended recipients.

The recipient Member States would also have the right to request more detailed information on any of these rulings, where the information is relevant to the administration of the tax laws.

Every year, Member States would have to provide statistics to the Commission on the volume of information exchange on tax rulings.

The objective of this proposal is to ensure that information on advance cross-border rulings and advance pricing arrangements is automatically exchanged between Member States when the conditions laid down in the new Article 8a are fulfilled.

9. 'automatic exchange' means,

(a) for the purposes of Article 8(1) and Article 8a, the systematic communication of predefined information to another Member State, without prior request, at pre-established regular intervals. For the purposes of Article 8(1), reference to available information relates to information in the tax files of the Member State communicating the information, which is retrievable in accordance with the procedures for gathering and processing information in that Member State.

(b) for the purposes of Article 8(3a), the systematic communication of predefined information on residents in other Member States to the relevant Member State of residence, without prior request, at pre-established regular intervals.

In particular, Article 1(3) of the proposed Directive inserts a new Article 8a into the existing Directive, which sets out the scope and conditions for the mandatory automatic exchange of information on types of tax rulings and transfer pricing arrangements as defined in the proposed Directive, inserted by Article 1(1) of the proposal.

Article 8a(1) provides that the competent authorities of a Member State shall, by automatic exchange, communicate information about defined tax rulings that they issue or amend to the competent authorities of all other Member States. This obligation is extended to rulings issued in the ten years before the date on which the proposed Directive takes effect that are still valid on the date of entry into force of the Directive (Article 8a(2)).

Article 8a

Scope and conditions of mandatory automatic exchange of information on advance cross-border rulings and advance pricing arrangements

1. The competent authority of a Member State issuing or amending an advance cross-border ruling or an advance pricing arrangement after the date of entry into force of this Directive shall, by automatic exchange, communicate information thereon to the competent authorities of all other Member States as well as to the European Commission. 

2. The competent authority of a Member State shall also communicate information to the competent authorities of all other Member States as well as to the European Commission on advance cross-border rulings and advance pricing arrangements issued within a period beginning ten years before the entry into force but still valid on the date of entry into force of this Directive;

3. Paragraph 1 shall not apply in a case where an advance cross-border ruling exclusively concerns and involves the tax affairs of one or more natural persons.

Article 1(6) of the proposed Directive enables the possible creation by the Commission of a secure central directory concerning information communicated in the framework of this proposal. This central directory would both facilitate the exchange of information and support Member States in their job of studying and reacting to rulings exchanged between Member States.

4. The exchange of information shall take place as follows:

(a) in respect of the information exchanged pursuant to paragraph 1: within one month following the end of the quarter during which the advance cross-border rulings or advance pricing arrangements have been issued or amended.

5. The information to be communicated by a Member State pursuant to this Article shall as a minimum include the following information:

(a) the identification of the taxpayer and where appropriate the group of companies to which it belongs;

(b) the content of the advance cross-border ruling or advance pricing arrangement, including a description of the relevant business activities or transactions or series of transactions;

(c) the description of the set of criteria used for the determination of the transfer pricing or transfer price itself in the case of an advance pricing arrangement;

(d) the identification of the other Member States likely to be directly or indirectly concerned by the advance cross-border ruling or advance pricing arrangement;

(e) the identification of any person, other than a natural person, in the other Member States likely to be directly or indirectly affected by the advance cross-border ruling or advance pricing arrangement (indicating to which Member State the affected persons are linked).

8. Member States may, in accordance with Article 5, request additional information, including the full text of an advance cross-border ruling or an advance pricing arrangement, from the Member State which issued it.

For this purpose, the proposal modifies Directive 2011/16/EU as amended by Directive 2014/107/EU9 by introducing a specific requirement for the automatic exchange of information on advance cross-border rulings and advance pricing arrangements.

14. 'advance cross-border ruling' means any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:

(a) is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;

(b) concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;

(c) relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person in the other Member State create a permanent establishment, and;

(d) is made in advance of the transactions or of the activities in the other Member State potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.

The cross-border transaction may involve, but is not restricted to, the making of investments, the provision of goods, services, finance or the use of tangible or intangible assets and does not have to directly involve the person receiving the advance cross-border ruling; …

15. 'advance pricing arrangement' means any agreement, communication or any other instrument or action with similar effects, including one issued in the context of a tax audit, given by, or on behalf of, the government or the tax authority of one or more Member States, including any territorial or administrative subdivision thereof, to any person that determines in advance of cross-border transactions between associated enterprises, an appropriate set of criteria for the determination of the transfer pricing for those transactions or determines the attribution of profits to a permanent establishment.

Enterprises are associated enterprises where one enterprise participates directly or indirectly in the management, control or capital of another enterprise or the same persons participate directly or indirectly in the management, control or capital of the enterprises.

Transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises, and “transfer pricing” is to be construed accordingly;

16. For the purpose of point 14 'cross-border transaction' means a transaction or series of transactions where:

(a) not all the parties to the transaction or series of transactions are resident for tax purposes in the Member State giving the advance cross-border ruling, or;

(b) any of the parties to the transaction or series of transactions is simultaneously resident for tax purposes in more than one jurisdiction, or;

(c) one of the parties to the transaction or series of transactions carries on business in another Member State through a permanent establishment and the transaction or series of transactions forms part or the whole of the business of the permanent establishment. A cross-border transaction or series of transactions shall also include arrangements made by a single legal person in respect of business activities in another Member State which that person carries on through a permanent establishment.

In Article 14 the following paragraph 3 is added:

3. Where a Member State makes use of any information communicated by another Member State in accordance with Article 8a, it shall send feedback thereon to the competent authority which provided the information as soon as possible, and no later than three months after the outcome of the use of the requested information is known, except if feedback has already been provided pursuant to paragraph 1 of this Article. The Commission shall determine the practical arrangements in accordance with the procedure referred to in Article 26(2)."