`Will limit the reporting of aggressive tax planning´
Last week the EU Court Justice made a striking decision. The court says that a 2018 directive intended to mandate the collection and exchange of information about cross-border tax arrangements, violates the lawyer-client confidentiality.
`This will limit the obligation to report on aggressive tax planning´, NHH researcher Elisa Casi-Eberhard says. She is an expert on tax policies, tax planning and administrative cooperation between countries.
«One Directive, Several Transpositions: A Cross-Country Evaluation of the National Implementation of DAC6». By Xiao Chen (postdoctoral research fellow, Chinese University of Hong Kong), Elisa Casi-Eberhard (Norwegian School of Economics), Mark D. Orlic (partner, PWC) and Christoph Spengel (professor, University of Mannheim).
NORWEGIAN WHITEPAPER 2019
On December 8, the European court of justice (ECJ) issued a new ruling, which limit the obligation to of intermediaries to report on aggressive tax planning arrangements as established under the 2018 directive also called DAC6.
The directive mandates the collection and automatic exchange of information about cross-border tax arrangements, which have certain characteristics of aggressive tax planning.
This EU directive does not apply to Norway unless Norwegian taxpayers have financial transactions to/from EU countries. However, in Skatterådgiveres opplysningsplikt og taushetsplikt (NOU 2019:15) the expert committee proposed that an obligation to provide information on tax arrangements ought to be introduced. Their proposal builds largely on DAC6.
PREVENT AGGRESSIVE TAX PLANNING
The main purpose of the EU Directive 2018/822 is to prevent the promotion and use of potentially aggressive tax planning schemes by intermediaries - like lawyers - and users. This is achieved by ensuring that European tax authorities receive information about such schemes before they are carried out.
Now, the EU judge wants to restrict the obligation of intermediaries to report on their clients’ tax aggressive transactions.
The reason is that ECJ claims that DAC6 violates the legal professional privilege and the lawyer-client confidentiality.
`In our research on DAC6 we show that limiting the intermediary reporting has important consequence for the effectiveness of DAC6. It hinders tax authorities’ ability to obtain information on aggressive tax arrangements. ´ Elisa Casi-Eberhard says.
In her paper One Directive, Several Transpositions: A Cross-Country Evaluation of the National Implementation of DAC6, Casi-Eberhard and her co-authors do a cross-country analysis. It highlights that a higher level of standardization of local DAC6 laws should be achieved to ensure the collection of high-quality, actionable data.
Thanks to DAC6, Casi-Eberhard states, tax authorities will get timely access to a comprehensive set of information on currently used tax planning arrangements.
Weak enforcement of the collection of information on aggressive tax planning, like it is in the case of limiting third party reporting, will reduce tax authorities’ ability to reduce tax avoidance and evasion, according to the NHH researcher.
TAX EVADERS REACT
`From our view point we see that tax evaders have reacted to this directive. They fear this transparency initiative. It is very important what we show in our study; it is crucial to limit self-reporting from the taxpayer and rather ensure third-party reporting from the intermediaries´.
This implies that if lawyers or other intermediates do not comply with regulations, they run a reputational risk, in addition to fines.
Tax evaders have reacted, and are afraid of being caught, according to the new study of DAC6.
`In our study, we saw movement of funds from countries like Spain, which has had a very strong enforcement. If lawyers did not report cases of aggressive tax planning, the government would give strict fines. There have been a movement of money out of Spain to countries like France and Austria, with weak enforcement. They became more attractive´.
MARIE SKŁODOWSKA CURIE FELLOWSHIP
Elisa Casi-Eberhard has been an Assistant Professor at NHH Norwegian School of Economics since 2021. Her research has mainly focused on the effectiveness of international initiatives on administrative tax cooperation.
In 2022, she won the Marie Skłodowska Curie fellowship for the project TAXFAIR.
`This project will provide a knowledge-based framework for governments and policymakers around the world to implement an effective system for the automatic exchange of information´, she says.
Tax evasion represents a pervasive phenomenon as the related revenues loss for governments, ranges from USD 441 billion per year in the United States1 to EUR 1,000 billion per year within the EU territory.
A CHALLENGE FOR EVERY COUNTRY
`A substantial portion can be attributable to income held abroad, especially in jurisdictions offering very attractive tax systems together with a sound level of bank secrecy, the so-called tax havens´.
As a response, many countries have implemented automatic exchange of information (AEOI) systems for the collection and exchange of financial account information across borders.
`It is very hard for tax authorities to know what is going on abroad. This is a challenge for every country. Tax authorities across countries have agreed to automatically exchange of information on financial assets and within the EU also on aggressive tax planning arrangements. Since more and more individuals earn their income abroad, such policies are needed to ensure tax compliance´, Elisa Casi-Eberhard says.
Now that all this information is exchanged across countries, the NHH researcher states, it is important to study how it worked. The idea of the project is to see to what extent this is useful.
Using high-quality Norwegian administrative data, TAXFAIR aims to analyse the effectiveness of the AEOI system to mobilize tax revenues and to determine the characteristics of an AEOI system that maximizes tax revenue extraction.