Mandatory Disclosure Rules: five key questions for banks

in Regulatory/Compliance, Tax, 10.05.2019

The Mandatory Disclosure Rules (MDR) Directive is one of the EU’s latest initiatives aimed at increasing tax transparency and exchange of information in tax matters. The MDR will in practice apply to many intermediaries (including banks) and their taxpayers involved in cross-border activities. Below are the five essential questions about the MDR that banks should address.

1. What are the key dates?

The Directive will have to be transposed by all Member States by 31 December 2019 and will generally be applicable as from 1 July 2020. However, a retroactive application is foreseen, based on which intermediaries (or taxpayers) will have to report information on cross-border arrangements implemented between 25 June 2018 and 1 July 2020. This information will have to be reported by 31 August 2020.

2. How will it work?

EU intermediaries (or taxpayers) will have to report certain cross-border arrangements that they develop or promote if these arrangements satisfy at least one of the features (referred to as “hallmarks”) listed in the Directive.

Those arrangements will have to be reported to the local tax authorities within 30 days from the day the arrangement is made available or is ready for implementation by the relevant taxpayer. The Member States to whom those arrangements are reported must share this information with all other EU Member States, on a quarterly basis, through a centralized database.

3. Is a bank an intermediary?

The reporting obligation applies to all intermediaries resident or established in the EU, unless protected by a legal privilege.

In essence, a bank can be an intermediary because it is either a promoter or a service provider. With respect to the former, and according to the Directive, an intermediary is “any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement.” As regards the latter, an intermediary also includes “any person that knows or could be reasonably expected to know that they have undertaken to provide aid, assistance or advice with respect to a reportable cross-border arrangement.”

Some practitioners are of the opinion that banks should not be intermediary when providing basic and routine banking services which have no active role in the tax aspects of an arrangement. Indeed, this interpretation of the term “intermediary” would require active facilitation, by the bank, of said arrangement.

Taxpayers may also have to comply with the new rules if the arrangement is developed in-house or if there is no EU intermediary (or an EU intermediary protected by a legal professional privilege).

In a nutshell, the degree of impact will depend on:

  • whether the bank, acting as an intermediary, is a promoter or a service provider
  • the type of bank (i.e. retail bank, commercial bank, custody bank, etc.)
  • the products or services provided (e.g. private banking, lending, custody, treasury, retail banking, service center, investment-fund servicing, etc.)
  • what kinds of information are at the disposal of the bank

4. Which transactions will have to be reported?

The reporting obligation applies to certain cross-border arrangements involving more than one Member State or a Member State and a third country.

An arrangement is reportable if it satisfies at least one of the hallmarks specified in the Directive. The specification of the hallmark is limited to the Directive but could be expanded by the relevant country. As Luxembourg has not published a draft law yet, at least the hallmarks from the Directive should be taken into account for determination of possible reportable tax arrangements.

Certain hallmarks can only be taken into account if a “main benefit” test is also satisfied, i.e. 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 obtaining a tax advantage.

At a minimum, hallmarks D, which deal with automatic exchange of financial account information, should apply to banks. However other hallmarks may also apply if the bank has designed, organized, or facilitated an arrangement.

5. Is your bank ready to report?

In light of the above, banks need to take necessary measures to:

  • analyze the nature of their cross-border arrangements and assess the potential reportable situations, taking into consideration the specificities linked to their banking activities
  • develop internal procedures as from now in order to already prepare the required documentation for reportable arrangements that have been put into place as from 25 June 2018 and that will have to be retroactively reported in 2020
  • identify potential situations where the bank would act as an intermediary on the basis of its activity / business model
  • identify affected departments and organize systematic collection of required information
  • sensitize affected departments to the new reporting requirements
  • develop controls / checklists to detect “hallmarks” with, in a first phase, a focus on the hallmarks relating to the exchange of information

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