The mandatory automatic exchange in the tax area

Over recent years, increasingly more initiatives concerning the automatic exchange of information have been implemented in order to react to aggressive tax planning phenomena. In the EU, many directives have progressively extended the perimeter of the automatic exchange of information, allowing the Tax Authorities of Member states to receive increasingly more data in an increasingly shorter time.

To further strengthen means available to Tax Authorities to prevent and discourage aggressive tax planning, Directive (EU) 2018/822 (hereinafter the «Directive»), which includes further adjustments to directive no. 2011/16/EU, introduced the mandatory automatic exchange of information in relation to the so-called “cross-border arrangements”. Specifically, the Directive obliges intermediaries and, in some cases, taxpayers, to inform Tax Authorities on certain schemes, agreements, etc. that could imply the presence of an aggressive tax planning.

The Directive has been implemented in Italy through legislation decree dated 30 July 2020 no. 100 (hereinafter, the «Decree»), which establishes the rules and procedures relevant to the mandatory automatic exchange of information on cross-border arrangements, reportable to the Revenue office, with the competent authorities of EU Member states and of other foreign jurisdictions due to arrangements in force.

The Decree has been recently integrated by the Decree of the Ministry of Economy and Finance dated 17 November 2020, containing the “definition of technical rules and procedures relevant to the mandatory exchange of information on cross-border arrangements, reportable to the Revenue Office” (hereinafter “DM”), thus completing the reference domestic regulatory framework on this matter.

Given the complexity of the regulation, this article provides a brief and introductory description of the key elements characterizing this new fulfilment, the relevant terms and applicable penalties in case of omitted or partial compliance. 

Concerned subjects

The new mandatory reporting of “cross-border arrangements” concerns the following categories:

• Financial intermediaries (e.g. banks, centralised financial instruments management companies, stock brokerage companies (SIM), asset management companies (SGR), insurance companies, etc.);
• Tax advisors, lawyers, and chartered accountants, who design, promote or provide assistance with reference to specific cross-border arrangements (i.e., so-called «Promoters» and so-called «Service Providers»);
• Taxpayers (companies), in case (i) there is no intermediary, or (ii) a non-EU intermediary is involved, or when the intermediary is exempt.

The concerned subjects represent one of the most relevant updates of the Directive, which, in fact, extends the mandatory automatic exchange of information to all economic operators being potentially involved in aggressive tax planning structures, while it was previously addressed only to some categories of intermediaries (for example, reference is made to the Common Reporting Standard or CRS).

It must be specified that taxpayers must comply with the obligation at issue only if, substantially, no financial intermediary or advisor being subject to the reporting obligation intervened in the potentially relevant operation.

Potentially reportable operations: “cross-border arrangements”

As previously mentioned, so-called “cross-border arrangements” must be reported. The Decree defines a cross-border arrangement as “a scheme, agreement or project concerning Italy and one or more foreign jurisdictions”, which meets the following requirements:

• It must include at least one of the “hallmarks” provided under the regulation (please refer to point 2.1. below);
• It must be available to involved parties starting from 25 June 2018 (effective date of the Directive). 

The Decree specifies that the involvement of one or more foreign jurisdictions occurs when at least one of the following conditions is met:

• one or more involved parties are resident for tax purposes outside the territory of the Italian State;
• one or more involved parties have a double tax residence;
• one or more involved parties have a permanent establishment in another jurisdiction and the scheme concerns this permanent establishment;
• one or more involved parties carry out their activity in another jurisdiction (without any permanent establishment).

Therefore, taxpayers must not necessarily be part of a multinational group to imply the application of the reporting obligation; in fact, it is sufficient that such taxpayer is involved in transactions with other tax jurisdictions.

Hallmarks

The so-called “hallmarks” that must be integrated in order for the scheme, agreement, or project to be reportable are structured to identify a high number of aggressive tax planning cases.

In fact, these are proper tax evasion or avoidance risk indicators and are designed to identify the following schemes, agreements, or projects:

• those aimed at obtaining a tax advantage for one or more parties involved; 
• those than can alter the correct application of the procedures concerning the automatic exchange of information (provided under CRS or FACTA) or concerning the identification of the beneficial owner.

As it can be understood, the cases considered by the hallmarks are numerous and in fact, the Directive – and, subsequently, the Decree – provides for five hallmarks categories, which are, in turn, divided into further sub-categories, for total fifteen different hallmarks.

Below is an outline of hallmarks:

1. Generic hallmarks linked to the main benefit test

• commitment to comply with a condition of confidentiality which may imply the non-disclosure of how the arrangement could secure a tax advantage;
• remuneration fixed by reference to the amount of the tax advantage derived from the arrangement (so-called success fee);
• application of a substantially standardised arrangement and/or structure that can bring a tax advantage;

2. Specific hallmarks linked to the main benefit test

• use of shell companies;
• conversion of income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax;
• round-tripping;

3. Specific hallmarks related to cross-border transactions

• deductible cross-border payments made between two or more associated enterprises where the recipient benefits from a concessional taxation or an exemption from taxation (providing different cases);
• deductions for the same depreciation on the asset in more than one jurisdiction;
• relief from double taxation in respect of the same item of income or capital in more than one jurisdiction;
• transfers of assets between different jurisdictions and where there is a material difference in the amount being treated as payable in consideration for the assets in those jurisdictions involved;

4. Specific hallmarks concerning automatic exchange of information and beneficial ownership

• arrangements which may have the effect of undermining the reporting obligation under the laws on the automatic exchange of Financial Account information (CRS or FACTA);
• arrangements involving a non-transparent legal or beneficial ownership;

5. Specific hallmarks concerning transfer pricing

• use of unilateral safe harbour rules;
• transfer of hard-to-value intangibles;
• intragroup restructuring, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, are less than 50 % of the projected annual EBIT if the transfer had not been made.
  
  

Main benefit test

Hallmarks under categories A, B, C, and E may only be taken into account where they can determine a reduction in taxation (Ministerial Decree, article 6).

Pursuant to article 7 of Ministerial Decree, hallmarks A, B, and C [point 1, letter b), sub 1), letter c), and letter d)] are considered integrated if the tax advantage deriving from the cross-border arrangement is higher than 50% of the sum of the tax advantage and non-tax advantages (so-called “Main Benefit”).

The tax advantage is calculated as the difference between tax payables by adopting the cross-border arrangement and tax that would be payable without such arrangement, while the non-tax advantage is defined as any quantifiable economic (non-tax) advantage.

In fact, besides hallmarks under category D, aimed at identifying the application of potentially opaque structures, only those concerning transfer prices are relevant regardless of the prevailing tax advantage.

Terms

With the coming into force of the Council Directive (EU) 2020/876 of 24 June 2020, which modified Directive 2011/16/EU, European countries were authorized to postpone (due to the Covid-19 pandemic) the terms concerning the communication of reportable cross-border arrangements to the Revenue Office to up to six months.

Italy, as most part of Member states (with the significant exclusion of Germany) opted for the postponement of original deadlines, thus implying that first deadlines for the new fulfilments are the following:

• By 31 January 2021: communication relevant to the period from 1 July 2020 to 31 December 2020;
• By 28 February 2021: communication relevant to the period from 25 June 2018 to 30 June 2020 .

These are two one-off communications relevant to the first application period of the regulation.  

Starting from 1 January 2021, intermediaries must report information to the Revenue Office within thirty days (generally, these start from the day following that on which the cross-border arrangement is made available for its execution or the day in which its execution starts).

On the contrary, taxpayers report information on cross-border arrangements within thirty days starting from the day following that on which they were informed by the exempt intermediary on the existence of the reporting obligation.

Penalties

In case of omitted communication, a fine from 3,000 to 31,500 Euro applies. 

In case of incomplete or incorrect communication, penalty is reduced to one third, i.e. it can be from 1,000 to 10,500 Euro.