Mandatory disclosure and legal protection in the Netherlands
The Mandatory Disclosure Rules (MDR) are laid down in Council Directive (EU) 2018/822 of 25 May 2018. It is the fifth amendment on Directive on Administrative Cooperation 2011/16/EU (DAC6). Although Directive 2011/16/EU was amended several times in order to enhance the means tax authorities can use to react to aggressive tax planning, there was still a need to reinforce certain specific transparency aspects of the existing taxation framework. According to recitals 2, 8 and 19 of MDR/DAC6 the objective is to improve the functioning of the internal market by discouraging the use of aggressive cross-border tax-planning arrangements and to prevent/close loopholes in legislation. In this blog I will focus on some Dutch issues regarding legal protection related to MDR/DAC6.
Main features MDR/DAC6
MDR/DAC6 places a reporting obligation upon intermediaries and/or taxpayers. The reporting obligation concerns potentially aggressive cross-border tax arrangements that meet one of the hallmarks listed in MDR/DAC6. By means of an automatic exchange the information reported will be communicated to the competent authorities of all other Member States through the common communication network (‘CCN’) developed by the Union. MDR/DAC6 applies mainly in direct taxes such as (corporate) income taxes. Regarding legal protection it is important to note that recital 18 of the MDR/DAC6 explicitly states that it respects the fundamental rights and that it observes the principles recognized in particular by the Charter of Fundamental Rights of the European Union (hereafter: the Charter).
MDR/DAC6 has been implemented in the Dutch Act on international exchange of information for taxes (‘Wet op de internationale bijstandsverlening bij de heffing van belastingen’; hereafter WIB) and the General taxes act (‘Algemene wet inzake rijksbelastingen’; hereafter AWR). In addition the Dutch State Secretary for Finance (Sts.) published a Guidance on cross-border arrangements subject to mandatory disclosure (Sts. directive June 24 2020-11382, Stcrt. 2020, 34991; only available in Dutch). This Guidance gives examples of arrangements subject to mandatory disclosure for each hallmark. It is important to note that the Guidance – as the Guidance itself states – cannot be considered as a set of anti-abuse measures. The fact that the Guidance gives an example does not mean that tax-arrangements with similar characteristics or features, are unacceptable according to Dutch tax law nor will such arrangements automatically be combatted with the specific Dutch extra-legal anti-abuse measure against tax evasion (in fraudem legis). This point of view is understandable because the reporting obligation has a wide scope and concerns ‘potentially’ aggressive cross-border tax arrangements and is aimed at closing existing loopholes in tax legislation.
On the other hand recital 2 of MDR/DAC6 states that ‘the fact that tax authorities do not react to a reported arrangement should not imply acceptance of the validity or tax treatment of that arrangement’. In accordance with this statement, article 16 paragraph 8 of the AWR stipulates that MDR-information received by the Dutch tax authorities in an earlier stage does not preclude the possibility of imposing additional tax assessments on the basis of that same information in a later stadium. This is an exception to an important basic rule in the Dutch tax system (article 16 paragraph 1 AWR) which forbids additional tax assessments on additional information if the Dutch tax authority had, or reasonably could have had, knowledge about this information at the moment of the primary tax assessment. This basic rule stems from the principle of legal certainty and the legitimate expectations of the taxpayer that tax assessments are final and carefully determined by the tax authorities on the available information. In relation to MDR/DAC6 however this principle seems absent and the Dutch tax authority can impose additional tax assessments even if the relevant information was available at the moment the primary tax assessment was imposed.
MDR/DAC6 (article 8ab, paragraph 5) protects intermediaries’ professional privilege by mandating that Member States may take the necessary measures ‘to give intermediaries the right to a waiver from filing information on a reportable cross-border arrangement where the reporting obligation would breach the legal professional privilege under the national law of that Member State’. In the Netherlands lawyers and civil law notaries have a legal professional privilege and they are entitled to the MDR-waiver (article 53a AWR in conjunction with article 10h paragraph 5 WIB). However, if the waiver applies, the reporting obligation shifts to the taxpayer or other intermediaries involved. This way the legal professional privilege and the right to legal advice seem to be derogated eventually.
Because of COVID-19 the Member States have been provided with the option to defer the mandatory disclosure (EU Directive of June 24th 2020, 2020/876). In the Netherlands it has been decided that the mandatory disclosure reporting obligation will start on the first of January 2021 instead of the initially intended date of entry into force (the first of July 2020). The MDR/DAC6 has retroactive effect. Cross-border arrangements from June 25th of 2018 have to be reported after the date of entry into force.
Penalties and fines
Article 25a of MDR/DAC6 imposes the Member States to ‘lay down the rules on penalties applicable to infringements of national provisions adopted pursuant to this Directive (…) and (…) take all measures necessary to ensure that they are implemented. The penalties provided for shall be effective, proportionate and dissuasive’. MDR/DAC6 leaves it to the Member States to stipulate the maximum amount of the fines.
According to article 11 WIB the Dutch MDR-fine amounts to a maximum of € 870.000. It can be imposed if the failure to report is due to intent (‘opzet’) or gross negligence (‘grove schuld’) of the involved intermediary or taxpayer. Depending on the degree of guilt the fine will amount 50% of the maximum fine (in case of intent) or 25% (in case of gross negligence) and depending on (aggravating or mitigating) circumstances these amounts can be adjusted (directive Sts. on tax fines ‘BBBB’, paragraph 25). Against the MDR-fine appeal is possible within the same procedural framework of appeal against (additional) tax assessments and administrative tax fines. In the Dutch legal system penalties can also be imposed through criminal proceedings if the failure to report under MDR is severe enough. Because the MDR-legislation seems to invoke intrusive reporting obligations and is aimed at closing existing loopholes in tax legislation, criminal proceedings are less likely to be expected.
If a taxpayer has a reasonably defendable point of view (‘pleitbaar standpunt’) in not reporting a cross-border arrangement, according to the Dutch legislator no MDR-fine will be imposed (EK 2019/20, 35255, no. C, p. 5). This is based on settled Dutch case law concerning administrative tax fines. Due to the broad definition of ‘cross-border arrangement’ and the vagueness of the list of hallmarks, not reporting a tax scheme might easily be qualified as a reasonably defendable point of view. The question is whether the Dutch doctrine on ‘pleitbaar standpunt’ will hold before the CJEU regarding MDR-fines, since the EU principle of effectiveness (e.g. CJEU april 26th 2005, C-494/01, ECLI:EU:C:2005:250 (Commission/Ireland); see also article 51 of the Charter) and article 25a MDR/DAC6 require Member States to take all measures necessary to ensure that the fines are effectively implemented.
The MDR-fine can be seen as a means of coercion to disclose aggressive cross-border tax-planning arrangements. In case the reported cross-border arrangements are not accepted by the Dutch tax authorities it is possible that taxpayers and intermediaries will be fined for filing incorrect tax returns. The reportable schemes can be situated at ‘the limits of the law’ and might be qualified not only as tax avoidance schemes but also as shams or close to tax fraud resulting in a criminal charge. The principle of non-self-incrimination (nemo tenetur) as laid down in article 48 of the Charter raises the question whether an MDR-report qualifies as so called Saunders-material, i.e. evidence that has an existence dependent of the will of the accused. If so, information derived from the MDR-report (including fruits of the poisonous tree) might be excluded as evidence for imposing (as a criminal charge qualifying) tax fines (cf. ECHR, April 5th 2012, no. 11663/04: Chambaz/Switzerland). Because MDR imposes the taxpayer or intermediary to ‘come forward’ with information under the threat of a fine, the MDR-report might be considered as Saunders-material and excluded as evidence for tax fines (see also N. Čičin-Šain, ‘New Mandatory Disclosure Rules for Tax Intermediaries and Taxpayers in the European Union – Another “Bite” into the Rights of the Taxpayer?’, World Tax Journal 2019 (vol. 11), no. 1, par. 3.2).
There is also the risk of double fines: one for not reporting a cross border arrangement under MDR and another one for filing an incorrect tax return concerning that same arrangement. Although this is not in immediate conflict with the principle of ‘ne bis in idem’ (MDR-reporting is something else than filing a tax return), at least an anti-cumulation measure might be desirable according to the principle of proportionality as laid down in article 49 par. 1 of the Charter and article 25a of MDR/DAC6.
Because of the retroactive effect of the reporting obligation, the principle of legality (nulla poena sine praevia legi poenali) enshrined in article 49 par. 1 of the Charter also comes into play. According to this principle no one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence under national law or international law at the time when it was committed. The MDR-reporting obligation is about to start at the first of January 2021, so strictly speaking the principle of legality will be met. However, the reporting obligation concerns cross-border tax arrangements dating from June 25th 2018. In a more extensive interpretation the principle of legality requires previous (national) laws constituting the cross-border arrangements which fall within the scope of the reporting obligation. This approach is plausible because essentially the MDR-fine aims at preventing aggressive cross-border tax planning and evasion in the EU and the reporting obligation is subservient to this goal. Interesting case law can be expected on this retroactivity of fines. However, it should be noted that during the Dutch legislative process it was considered that the tax authorities will hold back in such retroactive fining (EK 2019/20, 35255, no. C, p. 5 and TK 2019/20, 35255, no. 6, p. 26/27).
In accordance with the principle of procedural autonomy it is left to the Member States to establish administrative and judicial procedures, on condition, however, that those rules are not less favourable than those governing similar domestic situations (principle of equivalence) and that they do not make it excessively difficult or impossible in practice to exercise the rights conferred by EU law (principle of effectiveness) (judgment in Eturas and Others,C-74/14, ECLI:EU:C:2016:42, paragraph 32 and the case-law cited and Bensada C-161/15, ECLI:EU:C:2016:175, paragraph 24).
In the Dutch system of legal protection in administrative tax cases, appeal is only possible against a limited list of tax decisions (‘voor bezwaar en beroep vatbare beschikkingen’), a.o. (additional) tax assessments/fines and certain information orders. It is a ‘closed system of legal protection’ (‘gesloten stelsel van rechtsbescherming’). Against the MDR-reporting obligation as such, initiating an immediate judicial procedure is not possible. Moreover, intermediaries do not have the right to appeal against tax assessments/fines of the concerning taxpayers. In this closed system it also lacks an immediate legal remedy against the (automatic) exchange of information by the Dutch authorities.
In the Berlioz-case the CJEU (C-682/15, 16.05.2017, EU:C:2017:373) states that in application of article 47 of the Charter an information holder subject to a pecuniary fine is entitled to challenge the legality of an information order in the framework of an appeal against the fine. From this it can be concluded that legal judgement concerning the MDR-obligations can be found afterwards through an appeal against tax assessments/fines or against the MDR-fines. It seems not possible to have a judicial review on MDR-obligations in advance.
In Sabou (CJEU 22.10.2013, C-276/12, ECLI:EU:C:2013:678) the taxpayer relied on his right to a fair trial in claiming that he should be involved in forming the request for exchange of information between the competent authorities conducted based on the Directive on mutual assistance 77/799/EC. The CJEU considered this procedure as a preparatory stage that does not result in any decision that could be challenged by the taxpayer. It distinguished the ‘investigation stage’ from the ‘contentious stage’, between the tax authorities and the taxpayer, which begins when the taxpayer is sent the proposed adjustment. Based on this the CJEU concluded that the taxpayer cannot rely upon his right to a fair trial in the procedure between two tax authorities and as such does not have the right to be informed of or participate in the procedure.
In Berlioz par. 58 the CJEU made an important distinction with respect to circumstances that arose in Sabou. The Sabou-case concerned requests for information sent by the tax administration of one Member State to the tax administration of another Member State and, in particular, the right for the taxpayer who was the subject of a tax investigation in the requesting Member State to participate in the procedure relating to those requests. No request for information had, however, been sent to the relevant person, unlike in the case of Berlioz. Thus, in Sabou the CJEU was called upon to determine whether the taxpayer who was the subject of requests for information as between national tax administrations had a right to be heard in that process, and not, as in Berlioz, whether a relevant person in the requested Member State has a right to a remedy against a penalty imposed on him for failure to comply with an information order issued to him by the requested authority following a request for information sent to that authority by the requesting authority.
According to Advocate General Kokott in a recent case (Opinion July 2, 2020, C-245/19 and C-246/19), the addressee, the taxpayer concerned and other concerned third parties must be able to obtain judicial review of an order to provide information made in the context of the cross-border exchange of information between tax authorities. In par. 56, 57, 68-74 and 100-103, the AG states that the possibility to submit the issue through an appeal against a later tax assessment or fine is insufficient to guarantee the EU-rights of privacy, data protection and effective remedy (articles 7, 8 and 47 of the Charter).
The MDR-obligations can be placed somewhere in between Sabou and Berlioz. The MDR-reporting obligations are not effectuated through requests and information orders from the authorities. However, the MDR directly addresses intermediaries and taxpayers and the fundamental rights of privacy, data protection and effective remedy are at stake. Such an imposition of an obligation to provide information – and one which is subject to a fine – is not merely the preparatory step which the Sabou-case was about (cf. Opinion par. 55). If the CJEU decides according to the aforementioned Opinion, it gives an opening to improve judicial protection against MDR-obligations. For this improvement introduction of information orders on MDR-obligations might even be considered.
Conclusion | Legal protection relating to MDR/DAC6 raises some interesting questions and further developments can be expected in future (EU and Dutch) case law. Especially because MDR-fines can be seen as EU-fines, the impact of the Charter is expected to be considerably. A wide palette of EU-principles and fundamental rights is at stake, such as legal certainty/legitimate expectations, professional privileges/right to legal advice, nulla poena, nemo tenetur, fair trial, privacy and data protection.