The push for tax transparency through varied disclosure regimes such as country-by-country reporting (CbCR) and the more recent EU Council Directive 2018/822 on cross-border tax arrangements (DAC6) have pressed tax directors to spend time developing risk assessments and internal policies, which have travelled up the corporate framework to directly impact board members too.
“It is quite sensitive for all tax directors to advise board members about their responsibility and criminalisation of the tax function globally,” said one tax director with a media company. “With all the new disclosures going on it is important to advise the board of the reputational risk for us and where we need to have policies in place,” he added.
The UK started the wider trend of criminalising tax matters with the introduction of the UK Criminal Finance Act in 2017 in order to emphasise the need for greater corporate responsibility in international tax, according to taxpayers based in the EU.
Criminal tax liability is a daunting prospect for companies because they can be found guilty of an offence even if the board is not aware of its employees or associates committing any crimes. The reputational risks are high and these become even higher for companies in legal, accounting or tax services.
“We have tax mismatches sometimes, so we need to make sure that we align the contracting party with the invoicing party to make sure there is no legal or tax evasion items behind these transactions,” said the tax head at a financial services company.
Financial service providers said hybrid mismatch rules gave the industry a first look at transparency, but then they received another set of challenges under the global expansion of tax criminal liability.
“This is a huge project for us where you have to get all people on board to understand some positions or at least how some discussions with clients can lead to adverse consequences,” said the media tax director.
Tax professionals suggest using simple examples to contextualise the concern in board discussions such as consultants based in Spain may invoice the company from Korea, Croatia or Malta, which can get caught under disclosure regimes.
Talking about DAC 6, John Billige, EMEA operational tax director at State Street Global Markets, said at Hansuke’s financial services tax conference on November 7: “Everyone wants transparency these days. One of the main challenges is you can’t be transparent because we can’t see through all client agreements. Transparency is good but very difficult to manage.”
There are heightened fears because of the broader disclosure rules that take many stakeholders into account because companies and service providers may only have insight into small parts of the whole transaction. For companies caught by these rules the financial and reputational damage could be significant.
Sheena Tay-Schyma, finance and tax technology strategy at Blackrock, said at the Hansuke conference: “Multijurisdictional transactions are even more risky because disclosed information has different tax authority interpretations across countries based on their interests, rules and available data.”
Tax professionals said it is unreasonable to dissect every transaction made because of the number of resources required to effectively approach the process. Instead, many taxpayers and service providers are taking a closer look at their product line and business strategy to find gaps where tax reporting mismatches may take place ahead of DAC6 finalisations across the EU.
Other disclosure regimes such as FATCA and CRS are less concerning because they are rule based, but DAC6 is not governed by rules so much as principles with broad hallmarks. The lack of clarity means companies will have to apply a wide scope to their tax reporting to avoid legal trouble ahead.
“There is a risk in mass reporting too because we don’t know how information will be used in the future,” said Antonio Frade Correia, senior tax advisor at the European Fund and Asset Management Association (EFAMA).
All EU jurisdictions are required to transpose the DAC6 directive into domestic law by December 31 2019. Brexit has already led to concerning delays over the implementation of domestic DAC6 rules in the UK, which faces near-term tax uncertainties. Other jurisdictions face uncertainties too. For example, taxpayers in Switzerland, France and Germany told ITR about their unease over the data collection under DAC6.
Ahead of DAC6 being introduced across the EU, tax directors are paying more attention to risks the corporate board can face following the expansion of reporting measures and the criminalisation of tax matters. Data gathering and processing realisations will continue to evolve as companies adapt to more stringent reporting standards.
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