Draft German rules require reporting of cross-border tax planning

By Ninja-Antonia Reggelin

Last week, the German Federal Ministry of Finance sent an unpublished discussion draft to the states (Bundesländer) implementing the EU’s mutual assistance directive to put in place mandatory disclosure rules requiring intermediaries to report cross-border tax planning arrangements.

The discussion draft to a great extent implements the provisions of the EU mutual assistance directive word for word, especially in three new paragraphs (§§ 138d-f AO) of the German Tax Code.

Additional rules going beyond the EU directive would require the reporting of purely domestic tax planning arrangements. These provisions, backed by the German states, are still under discussion.

Professional secrecy exception

Under the new German discussion draft, the obligation to report cross-border tax arrangements is generally the responsibility of the intermediary. In cases where an intermediary invokes the right of professional secrecy or there is no intermediary, the obligation to notify is transferred to the taxpayer himself.

In particular, lawyers, tax advisors, and auditors should be able to apply the right of professional secrecy. However, they must inform their clients immediately about the transfer of the duty to notify if there is a reportable arrangement.

The information should be promptly disclosed, at the latest at the time of the reportable event. The notification must be made to the competent tax authority. The intermediary or the taxpayer will be assigned a contract number for handling the notification procedure. With this number, the taxpayer could, for example, demonstrate that a certain tax arrangement has already been reported by an intermediary.

Subsequently, the tax authorities must automatically exchange the obtained information on cross-border tax arrangements with the tax authorities of the other Member States.

Main benefit test clarification

Reporting is required if the expected main advantage or one of the main advantages of the arrangement is obtaining a tax advantage. The discussion draft clarifies that the so-called main benefit test is seen from the point of view of an unbiased third party.

The favorable effect of the tax advantage must be paramount. The notifier can prove the opposite by presenting compelling commercial reasons for the specific structuring of a transaction, thereby overshadowing any tax benefits.

Penalties

While the EU directive does not provide for an exact sanction framework, the German draft discussion classifies that a breach of the obligation to report is a regulatory offense with a fine of up to EUR 25,000.

The new rules should be applicable from 1 July 2020 in all cases in which the first step of a cross-border taxable transaction requiring notification occurred after 24 June 2018.

If the first step of a tax planning scheme occurs after 24 June 2018 but before 1 July 2020, the notification deadline is extended to two months after 30 June 2020.

Disclosure of domestic tax arrangements

The draft currently contains no regulations on the additional duty of disclosure for domestic tax arrangements discussed in Germany.

According to reports, such corresponding regulations are currently being discussed between the federal government and the federal states and could later be integrated into the law.

EU directive on mandatory disclosure

The EU’s amended directive on administrative cooperation in the field of taxation, which entered into force 25 June, obligates EU member states to adopt national legislation requiring advisors and/or their clients to disclose information on certain cross-border transactions and structures (called ‘arrangements’) by the national tax authorities.

Although the directive must be transposed into national law by December 31, 2019, and applies for the first time by July 1, 2020, EU states must implement this law so that reportable cross-border tax arrangements, put in place on or after June 25, 2018, must be reported retroactively beginning July 1, 2020, until August 31, 2020, at the latest.