The Council Directive (EU) 2018/822, of May 25 2018, usually known as DAC6, has as its stated purpose to enhance transparency, reduce uncertainty over beneficial ownership and dissuade intermediaries from designing, marketing and implementing harmful tax structures.
The setting up of these exchange of information schemes moves in a sensitive area between the public interest in the protection of national tax bases and several fundamental rights of taxpayers, namely the ones related with privacy and confidentiality, which are subject to remarkable restrictions under these reporting schemes.
Attending to this underlying conflict, all the adopted regulations must be subject to an accurate evaluation under the proportionality principle in order to ensure that they are in line with the fundamental rights and principles recognised in EU law, particularly the ones contained in the Charter of Fundamental Rights of the EU.
In accordance with the subsidiarity principle, DAC6 sets out a minimum level of exchange of tax information, although the Directive also states that a member state can take further national reporting measures of a similar nature.
Bearing this framework in mind, DAC6 has been transposed to the Portuguese jurisdiction by means of Law No. 26/2020, of July 21 2020. Within this context, the Portuguese state has gone beyond the directive regime, adding two specific features to the national regime.
- The first is related to the extension of the reporting obligation not only to cross-border arrangements but also to domestic arrangements.
- The second is related to the setting out of an additional reporting obligation applicable to intermediaries bound to confidentiality obligations either from legal or contractual nature.
According to this second feature, when a relevant arrangement has the intervention of an intermediary bound to confidentiality obligations (such as the legal professional privilege applicable to lawyers) the respective reporting duty should be met by the taxpayer, being the intermediary waived from complying with such obligation.
Nevertheless, whenever the taxpayer fails to comply with such a reporting obligation the intermediary will be again bound to fulfill such an obligation and cannot invoke his legal professional privilege to waiver it.
Within this scope, it should be highlighted that the regime arising from DAC6 does not foresee this additional reporting obligation, stating instead that the relevant intermediaries should be granted with a right to a waiver from filing information on reportable arrangements where the reporting obligation would breach the legal professional privilege under the national law of the relevant member state.
Thus, this restriction made by the Portuguese law to the legal professional privilege should be assessed not only taking into consideration the fundamental rights set out in the Charter of Fundamental Rights of the EU, but also taking into consideration the Portuguese Constitution.
As it has been recognised by the ECJ decision issued in C-469/17, Funke Medien, of July 29 2019, “a situation in which action of the Member States is not entirely determined by EU law, a national provision or measure implements EU law for the purposes of Article 51(1) of the Charter, national authorities and courts remain free to apply national standards of protection of fundamental rights (…)” – cf. paragraph 32.
Furthermore, it is peacefully understood that under Portuguese law the legal professional privilege of lawyers is a matter of fundamental rights, being the same grounded in constitutional rights such as the fundamental right to a fair trial, the right to confidentiality on communications and the right to privacy.
Considering the above, any restriction to a fundamental right, including the legal professional privilege, must be made in accordance with the proportionality principle and therefore such a restriction needs to be adequate to the end that it intends to achieve, as well as necessary and reasonable to achieve such purpose.
In this case, considering that the law sets out an absolute restriction to the legal professional privilege which is applicable whenever the taxpayer does not comply its reporting obligation and imposes the breach of such legal professional privilege to the intermediary in favour of the compliance of the reporting obligation, it seems that the above-mentioned requirements of need and reasonability are not met.
Therefore, there are strong grounds to sustain that this restriction violates the Portuguese Constitutional law and, possibly, the Charter of Fundamental Rights of the EU, as well as the European Convention on Human Rights.
In order to tackle this constitutional breach, the Portuguese Ombudsman has applied for the abstract review of the constitutionality of the regulations of this domestic restriction to the attorney’s legal professional privilege.
Updates on this matter should be seen in the near future which will hopefully clarify the boundaries of this reporting obligation, and increase legal certainty that is required to set out a well-balanced business-friendly environment for taxpayers, tax advisors and any other economic agents acting in the Portuguese territory.
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