The aim of identifying phenomena that can lead to tax avoidance
The Finnish Act on the Reporting Obligation for Cross-Border Tax Planning Structures (in Finnish: Laki raportoitavista järjestelyistä verotuksen alalla) came into effect on 1 January 2020, which is based on the so-called DAC6 Directive (6th Amendment of the Directive on Administrative Cooperation). This law aims to improve the transfer of information between tax authorities in the EU Member States regarding cross-border arrangements and transactions, where the arrangements are deemed potentially to involve elements of tax evasion or tax avoidance. As one of the conditions for the reporting obligation is a cross-border characteristic, purely domestic arrangements and transactions are not required to be reported in Finland.
This international element demonstrates one of the most fundamental ideas behind the regulation: to gather data on the occurrence of aggressive tax planning and avoidance, such as data on how and where corporations transfer their assets and profits. This data will help tax authorities in the EU determine how tax legislation should be developed and the type of arrangements that need to be identified in order to limit such tax planning and avoidance. However, it is still uncertain whether the reporting obligation may in practice be utilized in order to intervene in the actions of individual taxpayer.
Reporting agents and sanctions
The reporting obligation in the Finnish legislation is mainly aimed at service providers, i.e. the parties that plan the arrangement or assist in its implementation. For example, audit, consulting and accounting firms, as well as banks and even law firms may all fall within the scope of reporting obligation. The obligation may also fall on the taxpayer in cases where there is no service provider involved or when the service provider is exempt from reporting under the legislation. In Finland, failing to report may lead to a maximum penalty of 15,000 Euros. Penalties differ from one Member State to another. For example, the maximum penalty in Poland could reach millions of Euros. Therefore, businesses should check their reporting obligations on a group level in order to avoid penalties in Finland and/or in multiple countries for the whole international group.
The act does not explicitly determine the arrangements that are to be reported, but rather leaves the reporting obligation to be determined through a series of hallmarks. These hallmarks can be divided in two categories. The first category concerns cross-border arrangements where there is an access to a significant potential tax benefit. The second category does not require any access to a potential tax benefit, and a report must be made if any of hallmarks in that category are fulfilled. For example, one of these hallmarks involves certain transfer pricing arrangements, and therefore, international groups need to be aware of the DAC6 regulations. In practice, for instance, reporting sale and licensing of intangibles have been a concrete issue arising amongst in-house counsels and legal advisors.
As DAC6 is here for good and it imposes new reporting obligations on various bodies, Bird & Bird’s international tax team can assist companies in both identifying and complying with the reporting obligations both in Finland and elsewhere in Europe.
Despite the current COVID-19 pandemic, we can also deliver DAC6 training for small groups. Please contact us for further insight and instructions. After 45 minutes of training, you will learn to identify the arrangements that need to be reported, and how to implement a safe and prudent way to operate in the future.