Implementing the OECD mandatory disclosure rules: consultation

Update: To read our response to the consultation, see UK implementation of OECD mandatory disclosure rules: Simmons response.

The UK government has published draft regulations together with a consultation document on the implementation of the OECD Model Mandatory Disclosure Rules (MDR) in the UK. The regulations are intended to replace the existing International Tax Enforcement (Disclosable Arrangements) Regulations 2020 which implemented DAC6 in the UK (the DAC6 regulations) and apply to arrangements designed to avoid reporting under the Common Reporting Standard or certain opaque structures designed to obscure beneficial ownership.

The replacement rules will have broadly the same scope as the DAC6 rules as implemented in the UK, but will apply globally rather than in an EU context. The consultation confirms that it is HMRC’s intention to adopt largely the same interpretation wherever possible to the new MDR regulations to avoid any additional administrative burden on businesses.

Background

The EU DAC6 reporting regime was introduced in July 2020, but significantly delayed in many member states, including the UK, due to the COVID-19 pandemic. Since it was not implemented in the UK until after the end of the transition period, the UK announced that, rather than implementing the rules in full as originally intended, the UK would restrict its application to one hallmark only, hallmark D. As such, the International Tax Enforcement (Disclosable Arrangements) Regulations 2020 were amended and restricted by the International Tax Enforcement (Disclosable Arrangements) (Amendment) (No 2) Regulations 2020 with effect from January 2021.

Hallmark D covers the use of opaque offshore structures and the avoidance of reporting under the Common Reporting Standard (CRS) and retaining this aspect of the DAC6 rules was intended to align the UK with OECD rules rather than DAC6. However, at the time, HMRC indicated that it would in due course consult on and implement the OECD’s disclosure principles directly to replace DAC6.

The consultation document and draft regulations published as part of Tax Administration and Maintenance Day make good on this promise.

Consultation

The consultation document confirms that the government intends to replace the UK restricted DAC6 rules with replacement rules designed to apply the OECD MDR. The draft regulations for achieving this aim will draw closely on the MDR rules to provide consistency of application across jurisdictions. In addition, the consultation confirms that HMRC propose to take a very similar approach to the interpretation of MDR as it took for DAC6 to reduce the burden for businesses moving to MDR.

The OECD has published a commentary on MDR which provides guidance and interpretation of the rules, including examples of the types of arrangements and structures which might be expected to be caught. HMRC anticipate that there will be broad alignment between the OECD commentary and HMRC’s guidance which it intends to publish once the draft regulations are finalised. That guidance is also expected to closely follow the existing guidance on DAC6, except where changes are necessary to ensure alignment with the OECD rules.

Key concepts

The consultation confirms that even though some of the definitions may change, in essence most of the concepts used will remain the same as those under the DAC6 regulations. For example, the new regulations will refer to “promotors” and “service providers”, definitions not used in DAC6, but the consultation confirms that the concepts are “largely equivalent” and “it will be unlikely that a person would have a reporting obligation under one set of rules but would not have had one under the other”. Equally, the consultation states that HMRC consider that there is no material difference between the new definition of “reportable taxpayer” and a “relevant taxpayer” for the purposes of the DAC6 rules.

CRS avoidance arrangements will capture any arrangement “for which it is reasonable to conclude that it is designed to circumvent or is marketed as, or has the effect of, circumventing CRS Legislation or exploiting an absence thereof”. The consultation confirms that HMRC anticipate taking a consistent approach to the interpretation of this concept as set out in the OECD commentary to the Model rules.

An opaque offshore structure is defined as being a passive offshore vehicle held through an opaque structure. A passive offshore vehicle is one that does not carry on a substantive economic activity supported by adequate staff, equipment assets and premises, in the jurisdiction where it is established or tax resident. An opaque structure is one where it is reasonable to conclude that is designed to have, marketed as having, or has the effect of allowing, a natural person to be a beneficial owner of a passive offshore vehicle, while not allowing the accurate determination of such person’s beneficial ownership, creating the appearance that such person is not a beneficial owner. The consultation says that HMRC will continue to regard the test here as one aimed at obscuring ownership from the tax authorities (rather than being publicly available generally). On the other hand, the consultation also says that HMRC will not regard the test as not being met simply because beneficial ownership might be identified for the purposes of anti-money laundering rules where it is obscured from HMRC.

The reporting rules in the DAC6 regulations only apply to arrangements which ‘concern’ the UK and any other jurisdiction, or which concern two or more EU member states, or an EU member state and any other jurisdiction. The new draft MDR regulations, in line with the approach in the model rules, do not include any such territorial limitations and so arrangements and structures will be reportable regardless of which jurisdictions they involve, as long as the intermediary or taxpayer has a reporting obligation in the UK, which would derive from the intermediary or taxpayer having a UK nexus. The consultation acknowledges that this may be an additional burden. However, introducing a territorial limitation would create a misalignment between the UK regulations and the model rules, leading to potential inconsistencies in reporting between jurisdictions.

Moreover, HMRC consider that the additional information on arrangements and structures will be useful to HMRC in understanding how arrangements work, identifying potential loopholes in legislation and discouraging the promotion and use of potentially aggressive tax planning arrangements. It will also avoid the need for updates to the scope of the rules as and when additional jurisdictions sign up to MDR.

Exemptions

A person who would otherwise have a reporting obligation may be exempted from reporting in certain circumstances. This will be the case where:

• the information has already been reported to HMRC;
• the person has reported the information to the tax authority in a partner jurisdiction; and
• disclosing the information would require the person to breach legal professional privilege.

A partner jurisdiction is defined in the model rules as being a jurisdiction that has introduced substantially similar reporting rules and has the necessary exchange of information agreements in place to ensure that information will be provided to the appropriate tax authorities in the jurisdiction(s) where the reportable taxpayer(s) using the arrangement or structure is resident. The UK envisages publishing a list of partner jurisdictions in a Schedule to the regulations to give effect to this provision. Jurisdictions that have not signed up to exchange under the Multilateral Competent Authority Agreement on the Automatic Exchange regarding CRS Avoidance Arrangements and Opaque Offshore Structure are not expected to be ‘partner jurisdictions’ as they would not normally be able to automatically exchange this information, unless, exceptionally, other arrangements are in place.

The final exemption from reporting for intermediaries is where disclosing the information in question would breach legal professional privilege. Where a lawyer is unable to report information due to legal professional privilege, they must notify their client in writing of the client’s disclosure obligations (regardless of whether the client is another intermediary or a reportable taxpayer) within 30 days of the arrangement being made available or the assistance or advice being given. The client must comply with its disclosure obligations, within 30 days of the first step of the arrangement being implemented.

Time limit for reporting

The time limit for reporting for intermediaries is 30 days after the arrangement or structure is made available for implementation, or 30 days after the intermediary provides assistance or advice in relation to the design or implementation of the arrangement or structure. For taxpayers who have to report, the time limit for reporting is 30 days after the first step in the arrangement or structure has been implemented.

The draft MDR regulations, unlike the DAC6 regulations, do not include a reporting trigger when the arrangement is ‘ready for implementation’. Normally, the point when an arrangement is made available and the point when it is ready for implementation occur fairly close together. However, the consultation document notes that, exceptionally, there may be occasions where an arrangement is ‘ready’ but not yet ‘made available’, for example if the design of the arrangement is final and it could be implemented, but the intermediary decides to delay marketing it to potential clients. In these circumstances, a report may be due later under the draft MDR regulations than it would have been under the DAC6 regulations.

The consultation notes that HMRC has provided guidance on when an arrangement is ‘made available’ and when the first step has been implemented, and considers that the same interpretation will apply to the draft regulations.

Commencement

The government intends to bring the new MDR regulations into force in summer 2022, when they will replace the existing DAC6 rules in the UK.

However, it is currently envisaged that the rules will include provision requiring reporting of CRS avoidance arrangements that were entered into between the publication of CRS and the date the MDR rules are implemented. This requirement is part of the MDR themselves to remove any incentive to enter into CRS avoidance arrangements before the coming into force of the reporting rules. However, to reduce any administrative impact on businesses, the government intends to limit this requirement in a number of ways, including:

• the requirement to report pre-existing structures will be limited to CRS avoidance arrangements and will not apply to opaque offshore structures;
• the requirement will only apply to promotors and not service providers; and
• there will be a de minimis limiting the requirement to financial accounts of $1m or more.

There will be no requirement to report an arrangement already reported under the DAC6 regulations.

For pre-existing CRS avoidance arrangements, which are within the scope, reports must be made within 180 days of the rules coming into effect. As the rules are expected to come into force in summer 2022, the reports would be due by autumn/winter 2022, with the exact date to be confirmed.

Comment

The consultation document and draft regulations contain no great surprises and the determination to ensure that the rules change as little as possible from the existing DAC6 regulations is to be welcomed.

The consultation runs until 8 February 2022 and responses should be sent by email to mandatorydisclosure.rules@hmrc.gov.uk.