Policy Proposals Business Law Comments on the Public Discussion Draft on BEPS Action 12 (Mandatory Disclosure Rules)
Committee on Fiscal Affairs
Organisation for Economic Co-operation and Development
Comments on the Public Discussion Draft on BEPS Action 12
(Mandatory Disclosure Rules)
Keidanren hereby submits its comments on the Public Discussion Draft "BEPS Action 12: Mandatory Disclosure Rules" published by the OECD on March 31, 2015.
We understand the objectives of Action 12 that are to deter some multinational enterprises from undertaking aggressive tax planning (ATP), prevent base erosion, and ensure a level playing field. Strict control should be exercised over the promoters of base erosion and profit shifting (BEPS) schemes and abusive taxpayers who develop and use those schemes.
Nonetheless, it is not acceptable for ordinary taxpayers to suffer an undue increase in the administrative burden. Even if a mandatory disclosure regime were to be introduced, the majority of entities not engaging in ATP would not in principle be deemed parties obligated to report because they do not actively conduct such activities as buying and developing on their own the reportable schemes proposed in the Public Discussion Draft. Still, there is the concern that such a regime may lead to increases in compliance costs and disputes with tax administrations in the event of the regime lacking objectivity (as exemplified by the main benefit test and subjective hallmarks discussed below), having no materiality threshold, or requiring extensive information disclosure on the pretext of preventing ATP. Therefore, a balanced discussion is absolutely necessary under the acknowledgement of the need for protection of the fundamental rights of taxpayers, such as ensuring predictability and confidentiality. In addition, disclosure rules with sanctions might cause overcompliance. Attention should therefore be paid to the fact that the mind-set of taxpayers varies from country to country.
As Japan has no mandatory disclosure rules in place, we have not been able to sufficiently scrutinize the current regimes of other countries and the contents of the Public Discussion Draft within the short time frame given to us. Whereas under such circumstances we find it difficult to determine whether those rules should be introduced or not, we at least believe that, when considering a mandatory disclosure regime, taking into account the following four points is vital:
The first is the interaction with other BEPS Actions. As Action 13 leads to the provision of information through a master file and local files and the recommendations pursuant to other Actions (especially Actions 2, 4, 6, 7, and 8-10) are expected to significantly deter the use of BEPS techniques, compliance with international tax rules is likely to increase. While taking the perspective of international harmonization is important, it is equally important to examine how much progress has been made under other BEPS Actions and to review, based on the findings, how much risk each tax administration is still exposed to. It is debatable whether every country has situations that require the uniform application of Action 12 recommendations as early as possible.
The second point to consider is the specifics of a mandatory disclosure regime, were it to be introduced. As described under "design principles" in page 14 of the Public Discussion Draft, due consideration should be given to designing rules that are clear and easy to understand, and balance additional compliance costs to taxpayers with the benefits obtained by the tax administration, among other things.
Thirdly, clarification should be provided regarding the interaction with other disclosure rules such as advance ruling regimes and cooperative compliance programs. For the countries where those rules have already been introduced, it is essential to adjust what has to be reported under a mandatory disclosure regime in line with the existing rules in order to ensure that the introduction of the regime will not result in dual reporting obligations. Especially, the countries in which an advance ruling regime is not legally binding should also take into account legislating an advance ruling regime in parallel with introducing a mandatory disclosure regime. Another important matter to note is that, whereas the work on Action 12 is supposed to be coordinated with the work on cooperative compliance, the Public Discussion Draft is not clear enough as to how taxpayers subject to mandatory disclosure rules are positioned within the cooperative compliance framework. Further careful examination is required on this matter as well.
The fourth point is an application to international tax schemes. As part of BEPS countermeasures, the main challenge faced by Action 12 is thought to be how to apply the recommendations to international tax schemes. However, the criteria for application leave room for broader interpretation by each nation, raising serious concerns about a possible undue increase in the volume of information to be disclosed by taxpayers. In addition, tax authorities would use disclosed information unilaterally to ensure their tax revenue and therefore, an additional risk of double taxation would be caused in the situation that bilateral mutual agreement procedures under tax treaties are not virtually working in many countries. Another matter we deem crucial is information exchange among tax administrations, about which the Public Discussion Draft only states that further work will be done along with the work on Actions 5 and 13 (paragraphs 13 and 254). We cannot help but have the impression that the guidance for this matter is not sufficient in the Public Discussion Draft.
The Public Discussion Draft offers recommendations on mandatory disclosure rules and on a mandatory disclosure regime for international tax schemes. Based on the general comments stated above, we present below our comments on specific issues.
Comments on Specific Issues
III. Options for a Model Mandatory Disclosure Rule
A. Who Has to Report
The Public Discussion Draft provides two options: Option A is that both the promoter and the taxpayer have the obligation to disclose separately; and Option B is that either the promoter or the taxpayer has the obligation to disclose. We consider it preferable to combine Option B with the placement of the primary disclosure obligation on the promoter.
Imposing the reporting obligation on both the promoter and the taxpayer would unduly increase the administrative burdens of not only the taxpayer but also the tax administration in the form of larger enforcement and compliance costs. To avoid that, the primary disclosure obligation should be placed on the promoter who has a thorough knowledge of the entire scheme.
Imposing the reporting obligation on the promoter is expected to lead the promoter to inform the taxpayer that the proposed scheme will be disclosed as a reportable transaction to the tax administration. That way, the use of tax avoidance schemes will be effectively deterred. Additionally, where the proposed scheme by the promoter would be not adopted actually, or adopted with some modification on the taxpayer side, a difference between the content reported to tax authorities by the promoter and the actual implementation by the taxpayer would be caused. Therefore, it is one idea that the promoter should confirm the content reported to tax authorities with the taxpayer before they disclose the reportable transaction.
B. What Has to Be Reported
The Public Discussion Draft proposes two options, Option A being a single-step approach and Option B being a multistep or threshold approach (Box 3). It then outlines, in connection with the threshold approach, a main benefit test that is employed by many countries and uses the criterion of whether "the tax advantage is, or might be expected to be the main benefit or one of the main benefits of entering into the arrangement" (paragraph 81). The BEPS Project's objective of curbing abusive tax avoidance transactions implies that the reportable transactions should be limited to ones whose main benefit is to obtain tax advantages. From that standpoint, Option B (multistep or threshold approach) seems preferable on paper.
In practice, however, the efficient operation of mandatory disclosure rules calls for the rules to be clear and easy to understand as described under "design principles" in page 14 of the Public Discussion Draft. From that perspective, the main benefit test is not a desirable choice in that the criterion of whether the main benefit is to obtain tax advantages is ambiguous. Rather, the preferable method is to combine Option A (single-step approach) with filters (e.g. monetary filter) in order to produce effects similar to those of Option B (multistep or threshold approach). Additionally, given that risks vary depending on the hallmarks mentioned below, the filters (e.g. monetary filter), if employed in combination with Option A, should be diversified accordingly.
For designing generic hallmarks, two options are proposed: Option A being subjective hallmarks and Option B being objective hallmarks (Box 6). The adoption of Option A (subjective hallmarks) will call for the value of schemes to be reasonably estimated. There is the concern, however, that this process of examining scheme specifics may not be free from subjective judgments by tax administrations, as reflected in the use of phrases like "new and innovative transactions" and "reasonably be expected." Such subjective judgments may cause disputes between reporting entities and tax administrations, undermining predictability. In view of the design principles dictating that mandatory disclosure rules be clear and easy to understand, the adoption of Option B (objective hallmarks) is preferable as it will more effectively ensure fairness.
Although the confidentiality obligation owed by the client to the promoter is mentioned as a generic hallmark, it is common that, even under a standard tax-consulting agreement that is not aimed at obtaining tax advantages as its main benefit, each party owes confidentiality obligations to the other. Therefore, attention needs to be paid so as to prevent a transaction from being deemed reportable solely because of the existence of a confidentiality clause in the agreement.
We consider that the use of specific hallmarks in ways supplementing objective hallmarks will be instrumental in clarifying the hallmarks.
D. When Information Is Reported
The Public Discussion Draft proposes two options, Option A being a time frame linked to availability of a scheme and Option B being a time frame linked to implementation (Box 8). From the perspective of obtaining early information, which is one of the main objectives of mandatory disclosure rules, it is preferable that the primary disclosure obligation is placed on the promoter, who is then required to disclose information at the timing of Option A (time frame linked to availability of a scheme). However, a more clarified guidance should be provided since the definition of "availability of scheme" solely mentioned that "at this point all the information on how the scheme works must be available" in paragraph 141.
E. What Other Obligations Should Be Placed on the Promoters or Users
Identifying scheme users through the scheme reference numbers and client lists provided by the promoter is proposed as Option A in Box 9; and in cases where a country places the primary disclosure obligation on the promoter, the adoption of Option A is recommended in paragraph 172. Whereas the paragraph continues to recommend that, where domestic law allows, client lists be automatically provided to the tax administration, we believe it necessary to ensure that such automatic provision is made in a manner that considers the confidentiality obligation owed by the promoter to the client.
F. Consequences of compliance and non-compliance
Although Paragraph 200 states that "In order to enforce compliance with mandatory disclosure rules, countries should introduce financial penalties that apply if there is failure to comply with any of the obligations introduced.", certain incentives for taxpayers who comply properly with mandatory disclosure rules should be taken into consideration to enhance compliance more effectively.
IV. International Tax Schemes
Regarding an international tax scheme that a domestic taxpayer is obligated to report, the Public Discussion Draft recommends that it be defined as "a transaction with a domestic taxpayer that has material economic consequences for that taxpayer or material tax consequences for one of the parties to that transaction" in paragraph 243. We, however, have the following concerns about this recommendation:
(1) The guidance given is insufficient regarding what constitutes "material economic consequences" and "material tax consequences". Clarification and examples should be provided as to the transactions that have material economic consequences and material tax consequences. The timing at which those consequences are deemed to arise needs to be specifically defined as well.
For instance, in the Figure 3 example, the principal amount of an interest free loan provided by A Co. to B Co. is deemed to have material economic consequences for A Co. (paragraph 259). Yet, the question remains as to what the term "material economic consequences" specifically means in this context. Does it mean that B Co.'s recognition of a deemed interest payment for the loan and reduction in its tax burden will indirectly cause A Co.'s economic benefits to increase? Or, does the term refer to the transfer of funds itself?
(2) A problem also lies in the phrase "material tax consequences for one of the parties to that transaction." As cross-border transactions and supply chains become increasingly complex in today's globalized economy, there are cases in which the taxpayer and the promoter are unable to grasp all the relevant cross-border transactions and supply chains. Furthermore, in the event of specific hallmarks being defined not specifically but broadly, the scope of information to be disclosed would widen indefinitely, raising concerns about abusive disclosure requests being made on the pretext of capturing ATP. For these reasons, we believe it essential to set certain limitations on the scope of the parties to a transaction, for example, only parties immediately involved (based on governing tax law in the relevant jurisdiction) with a transaction should have an obligation to report.
Another concern is that, in the absence of a domestic promoter, the domestic taxpayer may be required to disclose information on the international tax scheme perceived to be high risk (in which the taxpayer is involved, in which material economic or tax consequences arise, and in which those consequences arise within the same controlled group or the taxpayer was a party to the arrangement), based on paragraph 251. This would increase the burden on taxpayers.
Paragraph 253 states that, if a domestic taxpayer does not possess the information required by the tax administration with regard to the reportable international tax scheme, the domestic taxpayer "should identify the persons who are believed to be hold the missing information and certify that requests for that information have been made to those persons." In the detailed design of a mandatory disclosure regime, due attention needs to be paid so that the tasks of identifying persons and certifying requests will not create an additional burden on taxpayers.
Subcommittee on Taxation