Tax Arrangements Are Now Being Watched: Are You on the List?
With the new mandatory disclosure rules introduced by Directive 2018/822 (" Directive" or "DAC 6"), from 25 June 2018 onward, EU- based lawyers, tax advisors and others that design, promote or implement cross- border tax planning arrangements are to collect and report potentially aggressive tax schemes to their national tax authorities. On the face of it, one would have thought that the Directive, having no binding force on Ukraine, does not concern Ukrainian businesses and individuals. However, a closer look reveals that both Ukrainian individuals and businesses may be affected by DAC 6.
Сross- border tax- planning schemes, designated to take advantage of the mobility of capital and persons in Europe, enable businesses to move taxable profits to more advantageous tax regimes. This results in lower tax revenues for EU Member States and unfair allocation of tax burden on good faith tax payers. In response, on 25 May 2018, the EU Council adopted the Directive on the mandatory disclosure and automatic ex- change of cross- border reportable tax arrangements.
The Directive obliges lawyers, tax advisors and others that design, promote or implement crossborder tax planning schemes, jointly called "intermediaries," to disclose potentially aggressive tax schemes to their tax authorities. Upon disclosure, this information is to be exchanged among EU Member States. If a tax advisor is not based in the EU, or if legal professional privilege were to apply, the reporting obligation shi s to the taxpayer.
This article addresses the main provisions of DAC 6 and the key issues for affected actors.
Scope of the Directive The Directive applies to cross- border arrangements that (i) involve at least one EU Member State, and (ii) meet one of the indicators or socalled "hallmarks."
In some cases, the mere presence of a hallmark (e. g. transfer of hard-to-value intangibles) triggers the reporting obligation. In other cases, a hallmark, such as debt-to- equity conversion, leads to reporting only if the arrangement was aimed at obtaining a tax benefit.
To identify if a cross- border scheme is reportable, an affected party would have to assess the transaction against the hallmarks and, should at least one of them be present, disclose it.
Reporting intermediaries must provide information about themselves and relevant taxpayers, details of the hallmarks triggered, a summary of the arrangement with its value and, notably, identify the Member States likely to be concerned. Who is obligated to report? The burden rests with intermediaries. The definition of an intermediary covers all EU- based actors that are involved in designing, marketing or implementing of a reportable cross- border arrangement, as well as those who provide assistance. These may include, for example, lawyers, financial intermediaries, tax advisers and accountants.
In the absence of an intermediary, for instance when a taxpayer implements a reportable arrangement in- house, the reporting obligation is placed on the taxpayer. Likewise, the reporting obligation shi s to the taxpayer if the intermediary is not allowed to disclose the arrangement due to legal professional privilege or is a non- EU resident.
Local implementation and enforcement EU Member States must implement the Directive into law by 31 December 2019. Affected taxpayers and intermediaries are required to file by 31 August 2020 information covering the arrangements implemented between 25 June 2018 and 1 July 2020. Accordingly, affected actors should monitor potentially reportable arrangements that have occurred from 25 June 2018 onwards. However, until the exact provisions of local legislation are available, identifying reportable schemes will be a challenge.
In terms of liability for non- compliance, the Directive leaves it to Member States to set forth "effective, proportionate and dissuasive" penalty rules.
percent of the banking sector's assets. IIB — despite their large amounts of capital — was conspicuously absent from the list of banks that would be assessed and no reason for this was provided.
If IIB had underperformed in the eyes of such an assessment, or if it had been revealed to simply be a pocket bank for Poroshenko and his closest affiliates, it could have been liquidated or forced with closure — much like ninety other Ukrainian banks that have suffered a similar fate.
The NBU didn't respond to requests for information or clarifications, nor did they respond to requests for an interview. An NBU spokesperson did say they were working to provide Kyiv Post with the requested information but needed more time.
Kyiv Post reached out to Elena Snezhko, head of strategic communications and media relations for the NBU. She said her team was working on providing an official response but nothing had been received by the time Kyiv Post went to print.
IIB was incorporated in 2008 and, despite little attention and media coverage, is not understood to have had any prior disputes with the NBU. During the two years after Petro Poroshenko's 2014 election, Valeria Gontareva was the NBU governor — before that, she headed Investment Capital Ukraine or ICU, an investment fund with strong ties to Poroshenko and his affiliates.
At the time of writing, the nature of the relationship between the NBU and IIB remains unclear, as does the status of any legal dispute between them.
President’s transparency Some politicians have learned the importance of being transparent with the public about their business dealings and income and Poroshenko has learned a harder lesson than most.
In 2016, lawyers said that a secretive company in the British Virgin Islands tax haven, registered to Poroshenko, raised lots of unanswered questions about the president's finances. Observers and analysts said the scandal that followed badly eroded public trust in Poroshenko.
His BVI company, Prime Asset Partners — the existence of which was revealed by a massive leak of documents called the Panama Papers — was reported to anti-corruption investigators and suspected as an offshore scheme for evading tax which the president denies. Past claims that Poroshenko has transferred business holdings into a blind trust have also been disputed, owing to a lack of documentary evidence provided by the president.
In recent years, Poroshenko appears to have improved his efforts to declare income and dividend payments but it's not clear how accurate such declarations are.
For 2017, his office declared income of about $580,000 (Hr 16.3 million) from interest payments. They said he received no dividend payments from his business interests, as reported by the Ukrainska Pravda newspaper. The previous year, Poroshenko declared capital holdings of 14,185 euros and 393 British pounds in deposits at IIB.
Meanwhile, IIB'S assets and financial performance remain shaded and confusing, as do their corporate strategy and commercial activities. IIB financial statements for the first three months of 2018 show a significant reduction in net profit, down to $348,000 from $960,000 in the same period last year.
What is clear, according to central bank records, is the bank's ownership structure: 60 percent owned by Poroshenko while other minority stakes are held by his closest affiliates in politics and business — Ihor Kononenko, Oleh Hladkovsky and Oleh Zimin.
Yuriy Tsvetkov, Counsel, Baker Mckenzie
Tetyana Levkovets, Associate, Baker Mckenzie