H.M Government of Gibraltar has recently published the Income Tax (Amendment) Regulations 2020 in the Gibraltar Gazette, which introduces mandatory disclosure rules for intermediaries (and in some cases taxpayers) in respect of cross-border arrangements that exhibit certain “hallmarks”.
The new regulations have been transposed into the Income Tax Act 2010 Council Directive (EU) 2018/822 (DAC 6).
What is an intermediary?
DAC 6 provides that anyone who designs, markets, organises, makes available or manages the implementation of a reportable cross-border arrangement is an intermediary. In addition, anyone who knows or could reasonably be expected to know that they have undertaken to provide (directly or indirectly) aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement is also an intermediary.
Intermediaries could include, amongst others, tax consultants, banks, fiduciaries and tax lawyers. We have produced the following guide for intermediaries, with details of the changes and everything you need to know.
The reportable cross-border arrangement
DAC 6 provides that a cross-border arrangement concerns more than one-member state or a member state and a third country, where at least one of the following conditions is met:
Not all the participants in the arrangement are resident for tax purposes in the same jurisdiction
One or more of the participants is simultaneously resident for tax purposes in more than one jurisdiction
One or more of the participants carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment
One or more of the participants carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction
The arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership
“Arrangement” is not fully defined in DAC 6, but includes a series of arrangements and may compromise more than one step or part.
What types of cross-border arrangements will be disclosable?
A cross-border arrangement will be disclosable under DAC 6 if it meets one or more of a number of specified hallmarks. The regulations identify various hallmarks, which are divided into categories, as set out below.
Generic hallmarks under Category A and specific hallmarks under Category B may only be taken into account where they fulfil the “main benefit test”. That test will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
Category A: generic hallmarks linked to main benefit test
An arrangement will fall within Category A if they fall within one or more of the following, and satisfy the main benefit test:
Taxpayer or participant is subject to a confidentiality condition preventing them from disclosing the details of the arrangement (Condition A1) The intermediary is entitled to receive a fee, which is fixed by reference to either the amount of the tax advantage of a tax advantage is actually derived from the arrangement. (Condition A2)
The arrangement has substantially standardised documents or structure (or both) and is made available to more than one taxpayer with little customisation (Condition A3)
Category B: specific hallmarks linked to main benefit test
An arrangement will fall within Category B if they fall within one or more of the following, and satisfy the main benefit test.
A participant in the arrangement takes contrived steps which consist in acquiring a loss-making company, discontinuing the main activity of such company and using its losses in order to reduce its tax liability, including through a transfer of those asserts to another jurisdiction or by the acceleration of the use of those losses (Condition B1)
An arrangement that has the effect of converting income to capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax (Condition B2)
An arrangement which includes circular transactions resulting in the round-tripping of funds, through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features (Condition B3)
Category C: specific hallmarks related to cross-border transactions
An arrangement will fall within Category C if they fall within one of the following:
An arrangement that involves deductible cross-border payments made between two or more associated enterprises where at least one of the following conditions occurs:
The recipient is not resident for tax in any tax jurisdiction (Condition C1(a))
Although the recipient is resident for tax purposes in a jurisdiction, that jurisdiction either:
Does not impose any corporate tax or imposes corporate tax at the rate of zero or almost zero (Condition C1(b)(i)); or
Is included in a list of third-country jurisdictions which have been assessed by member states collectively or within the framework of the OECD as non-cooperative (Condition C1(b)(ii))
The payment benefits from full exemption from tax in the jurisdiction where the recipient is resident for tax purposes (Condition C1(c))
The payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes (Condition C1(d))
If any of Conditions C1(b)(i), C1(c) or C1(d) is met, the main benefit test must also be met.
Arrangements also fall within Category C if they fall within one of the following:
Deductions from the same deprecation on the asset are claimed in more than one jurisdiction (Condition C2)
Relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction (Condition C3)
There is an arrangement that includes transfer of assets and where there is a material difference in the amount being treated as payable in consideration for the assets in those jurisdictions involved (Condition C4)
Category D: specific hallmarks concerning automatic exchange of information and beneficial ownership
An arrangement which may have the effect of undermining the reporting obligation under the laws implementing EU legislation or any equivalent agreements on the automatic exchange of financial account information, including agreements with third countries (e.g. FATCA and CRS), or which take advantage of the absence of such legislation or agreements. These arrangements include the following:
The use of an account, product or investment that is not, or purports not to be, a financial account, but has features that are substantially similar to those of a financial account (Condition D1(a))
The transfer of financial accounts or assets to, or the use of jurisdictions that are not bound by the automatic exchange of financial account information with the state of residence of the relevant taxpayer (Condition D1(b))
The re-classification of income and capital into products or payments that are not subject to the automatic exchange of financial account information (Condition D1(c))
The transfer or conversion of a financial institution or a financial account or the assets therein into a financial institution or a financial account or assets not subject to reporting under the automatic exchange of financial account information (Condition D1(d))
The use of legal entities, arrangements or structures that eliminate or purport to eliminate reporting of one or more account holders or controlling persons under the automatic exchange of financial account information (Condition D1(e))
Arrangements that undermine or exploit weaknesses in the due diligence procedures used by financial institutions to comply with their obligations to report financial account information, including the use of jurisdictions with inadequate or weak regimes of enforcement of anti-money laundering legislation or with weak transparency requirements for legal persons or legal arrangements (Condition D1(f))
An arrangement involving a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures:
That do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises (Condition D2(a))
That are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures (Condition D2(b))
Where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, are made unidentifiable (Condition D2(c))
Category E: specific hallmarks concerning transfer pricing
An arrangement which involves the use of unilateral safe harbour rules. (Condition E1)
An arrangement involving the transfer of hard-to-value intangibles (HTVI). HTVI covers intangibles or rights in intangibles for which, at the time of their transfer between associated enterprises: No reliable comparable exist (Condition E2(a))
At the time the transactions were entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer (Condition E2(b))
An arrangement involving an intra-group cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50% of the projected annual EBIT of such transferor or transferors if the transfer had not been made. (Condition E3)
Disclosure by intermediaries
The regulations provide that, generally, intermediates will have to disclose the required information to the Commissioner of Income Tax within 30 days after the earliest of the reportable cross-border arrangement being made available for implementation, being ready for implementation or when the first step in the implementation is ready.
Legal profession privilege under the regulations
The regulations confirm specifically that intermediaries are not required to disclose an arrangement where the reporting obligation would breach the legal professional privilege under the law of Gibraltar. However, an intermediary must notify other intermediaries, or the taxpayer of the reporting obligation.
Disclosure by taxpayers
The regulations provide that taxpayer obligations apply to “relevant taxpayers”. Where there is no intermediary or if the intermediary is covered by legal professional privilege, the relevant taxpayer must disclose the required information to the Commissioner of Income Tax within 30 days after the earliest of the reportable cross-border arrangement being made available for implementation to the taxpayer, being ready for implementation by the taxpayer or when the first step in its implementation is taken.
The reporting obligations will start to apply as of 1 July 2020, but will cover arrangements implemented after 25 June 2018, which will have to be disclosed retrospectively.
What must be disclosed?
The regulations provide that the following information must be disclosed:
The identification, tax residence and Taxpayer Identification Numbers of the intermediary and relevant taxpayers
Details of the relevant hallmarks
A summary of the content of the arrangement (including any name by which the arrangement is commonly known)
The date on which the first implementation step has been or will be made
Details of the national legislation which forms the basis of the arrangement
The value of the arrangement
The member state of the relevant taxpayer and any other member state likely to be concerned by the arrangement
The details of any other person in a member state likely to be affected by the arrangement .
As the regulations will have implications for intermediaries, such as tax consultants, banks, fiduciaries and lawyers, we recommend that those who may be affected by the regulations take full advice as soon as possible in order to understand their reporting obligations arising from the regulations.
If you require further information or would like to discuss the changes, please contact ISOLAS senior associate and tax specialist Stuart Dalmedo on: email@example.com