Tax Ar­range­ments Are Now Be­ing Watched: Are You on the List?

Kyiv Post Legal Quarterly - - Contents -

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

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