The European Union (EU) has introduced a Mandatory Disclosure Regime (MDR) aimed at boosting transparency to tackle what it sees as aggressive cross-border tax planning.
The MDR, which entered into force on 25 June 2018, requires certain transactions and arrangements to be disclosed to the tax authorities. This requirement may increase the risk for insurers when insuring tax treatments associated with such arrangements. The purpose of this bulletin is to investigate the implications of the MDR for the insurance of certain tax risks.
BRIEF OVERVIEW OF THE MDR
In terms of the MDR, reportable arrangements, where the first step of implementation is taken from 25 June 2018, will have to be reported to the relevant tax authorities by 31 August 2020. The deadline for EU Member States to adopt the MDR is 31 December 2019, including the UK (depending partly on Brexit negotiations). Any reported arrangement would be shared between all Member States.
What arrangements are reportable?
- Firstly, the arrangement needs to be a cross-border arrangement (i.e. a transaction, series of transactions, structure or scheme between Member States or a Member State and a third party state);
- Secondly, the arrangement needs to fulfil at least one of a set of “hallmarks”, once it has been established that the “main benefit or one of the main benefits” of the arrangement was to obtain a tax advantage;
- Alternatively, if the arrangement does not fall within the “main benefits” test, it should be tested against another set of “hallmarks” to determine whether it needs to be reported.
Note that it is not the purpose of this bulletin to explain the “hallmarks” due to the relatively technical nature thereof; however a wide range of arrangements may be caught by the MDR provisions.
IMPLICATIONS OF THE MDR FOR TAX INSURANCE
It is quite foreseeable that tax insurance may be required for certain tax risks, which relate to reportable arrangements under the MDR (e.g. insuring the tax neutral nature of a restructuring exercise, or insuring against capital gains tax risks).
Although insurers would typically only be prepared to insure tax risks they are comfortable with, and would not insure so-called “discovery risks” (i.e. insurance against the risk that the tax authority may discover a dubious tax position), the specific disclosure of a certain insured tax treatment (as part of a reportable arrangement) to the tax authorities may make some insurers uncomfortable.
To what extent this may be the case is discussed below.
The obligation to report a MDR arrangement lies with intermediaries (e.g. tax advisors), amongst others. This requirement is widely drafted and may even include banks. It will be interesting to monitor the evolution of the approach of tax advisors, banks and, indeed, the insurance market on these new rules. If insurers or insurance brokers are included under this reporting obligation, it may alert a tax authority that certain tax risks associated with the reportable arrangement have been insured. This could raise the risk for insurers that the tax authority may focus on the insured tax treatment.
However, there appears to be strong arguments that insurers at least, should not be caught by these provisions.
The mere potential disclosure (directly or indirectly) of an insured tax treatment to tax authorities under the MDR could increase the risk profile of the tax issue.
Note the fact that the risk profile of a particular tax issue is raised because of the MDR, should not make a tax risk uninsurable but may affect the insurer’s risk appetite and pricing depending on a number of factors.
Provided that legal or industry guidance do not prevent insurers from insuring tax risks associated with MDR arrangements, such risks should remain insurable. This is good news for entities looking to mitigate heightened risks associated with the disclosure of MDR arrangements and tax insurance may become increasingly relevant in relation to these arrangements.
For further information please contact Leon Steenkamp, Head of Tax Insurance, on +44 (0)20 7558 3994