On 31 March 2015 the OECD released a discussion draft in respect of Action 12 of the action plan on base erosion and profit shifting (BEPS). Action 12 calls for disclosure initiatives to deal with the lack of relevant information for tax authorities on tax planning strategies. The action calls for the development of recommendations on the design of mandatory disclosure rules. The discussion draft looks at how these rules have functioned in countries that have adopted them and recommends a modular design for disclosure regimes.

The guidance in the discussion draft takes the form of a standard framework for such regimes with options that would offer flexibility to tackle specific risks in a particular country. This would permit a tax administration to have control over the amount of disclosure and the type of disclosure required.

The draft also sets out recommendations on rules for the disclosure of international tax schemes. In relation to international tax schemes the draft discusses the design of enhanced models of information sharing. These would need to be coordinated with other parts of the action plan such as actions 5 and 13 which also include exchange initiatives. Also the Forum on Tax Administration is working on a framework to allow tax administrations to cooperate.

If tax administrations have access to the relevant information at an early stage they can perform risk assessment more quickly and respond earlier to compliance issues. Mandatory disclosure schemes require taxpayers and promoters of schemes to disclose potentially aggressive or abusive tax planning arrangements at an early stage if they come within the definition of a reportable scheme.

Mandatory disclosure rules permit a fast response to transactions that are regarded as artificial tax avoidance. Identification of reportable schemes is done by means of certain hallmarks that are typical of these schemes.

Reporting requirements

Countries introducing mandatory disclosure rules have to determine who has the responsibility to report the scheme, what has to be reported and at what time. Existing disclosure regimes are classified as either transaction-based or promoter-based. A transaction based regime such as that used in the US looks at transactions that are likely to be risky and then requires disclosure from persons gaining a tax benefit from the scheme or from persons providing material assistance in relation to the scheme. A promoter based scheme, for example the UK rules on disclosure of tax avoidance schemes (DOTAS), looks at the promoters of the scheme but also takes into account the types of reportable scheme that must be disclosed.

Countries adopting mandatory disclosure would need to decide whether to introduce a dual reporting requirement for the promoter and taxpayer or a reporting requirement primarily for the promoter of the scheme. This reporting requirement could switch to the taxpayer where the promoter is off shore or asserts legal privilege, or where there is no promoter.

Hallmarks

Generally under existing rules a scheme is reportable if it falls within certain descriptions or hallmarks. There may also be a threshold that the scheme initially has to pass, such as having the features of an avoidance scheme or if the main purpose was to gain a tax advantage. Alternatively to or additionally to the threshold test there could be a de minimis filter.

Hallmarks are either generic, targeting features common to marketed tax schemes, such as a premium fee or confidentiality requirement, or specific. Generic hallmarks would be used to capture new and innovative tax schemes. Specific hallmarks would cover known vulnerabilities in the tax system or techniques commonly used in schemes such as the use of losses.

Disclosure of international tax avoidance schemes

Action 12 of BEPS also aims to aims to look at further tools for dealing with cross-border tax avoidance schemes. Mandatory disclosure of international avoidance schemes would involve a wider definition of a tax benefit so that such schemes could be captured. Tax administrations need to have real time information on international tax planning schemes so a complete picture can be gained of their consequences. The rules need to be appropriately targeted and must capture the key information. The rules should not require unnecessary disclosure and should not impose unnecessary compliance burdens on taxpayers.

The discussion draft recommends the development of hallmarks that target the specific risks from cross-border tax planning but are wide enough to capture innovative international tax planning techniques. It calls for a broad definition of an arrangement so that the rules would treat an arrangement involving a domestic taxpayer as a reportable scheme if it includes a cross-border outcome, wherever that outcome may arise.

There should not be any threshold condition for schemes to be disclosed but the rules should avoid imposing an unnecessary compliance burden on taxpayers by requiring disclosure only when the taxpayer is a party to the scheme and only when the cross-border outcome occurs within the same control group.

Taxpayers, advisors and intermediaries should report all the material information about the international tax avoidance arrangement that is in their possession and where they have incomplete information or cannot disclose it they should identify persons who have the information and certify that they have written to request that information, to the extent that their domestic law permits this.

Public consultation

The action plan on BEPS calls for the work on this action to be completed by September 2015. Public comments on the discussion draft should be sent to the OECD by 30 April 2015. There will be a public consultation on the issue on 11 May 2015.