Mandatory Disclosure Rules: companies can’t rest on their laurels
Regulatory update 4 minute read

Mandatory Disclosure Rules: companies can’t rest on their laurels

19 August 2021

The first reporting round may be complete, but companies can’t rest on their laurels. They need to act swiftly to ensure they have the right processes in place to meet ongoing Mandatory Disclosure Rules (MDR) obligations, with a requirement to report on new CBAs within 30 days of their identification.

The European Union (EU) directive on MDRs was introduced to increase transparency and to help tax authorities identify potentially aggressive cross-border tax planning.

It came into force across the EU in 2020, but the majority of reporting deadlines were pushed back into the first half of 2021 due to the ongoing disruption caused by the surging Covid-19 pandemic.

Understanding the requirements

MDR has led to the introduction of new, and extensive, reporting obligations for a wide range of transactions.

The directive specifically requires EU Member States to implement legislation that obliges taxpaying companies or their intermediaries, such as banks and advisors, to report information on certain cross-border arrangements (CBAs) to the authorities if the arrangements contain certain hallmarks. The information collected by each Member State is then automatically exchanged with other Member States that may have an interest in the arrangements.

It’s a complex undertaking. Companies should be aware there are five categories of hallmark: generic hallmarks; specific hallmarks related to the main benefit test; specific hallmarks related to cross-border transactions; specific hallmarks concerning the automatic exchange of information and beneficial ownership; and specific hallmarks concerning transfer pricing.

Overall, there are then 20 sub-categories of reportable hallmark, covering a wide range of CBAs. And the reporting obligation isn’t limited to ‘aggressive’ tax schemes or deliberate tax avoidance, and can in fact apply to standard transactions with no particular tax motive.  

While the directive doesn’t contain any specific rules about the information that must be reported, it does set out what EU Member States and the UK need to collect for the purpose of exchanging with other interested states. This includes the identity of the taxpayer or intermediary, the jurisdictions concerned, the date of the CBA, the commercial reasons for entering into the CBA and its value, and a summary of the content of the reportable CBA.

Analysing the first reporting round

Reflecting on the recently completed first reporting round, it’s clearly been a considerable task for companies and intermediaries to collate all the information required. While intermediaries have picked up the bulk of the work, one trend we’ve seen is larger corporates attempting to develop in-house teams for MDR, which hints at the scale of the resource needed.

That said, the first reporting round went smoothly in general, with not too many technical issues flagged. As it’s a new process, there was inevitably lots of communication with the European tax authorities about how to best present the information. As the rules are open to interpretation, this sometimes created different perspectives and understanding among intermediaries, but working together, with good communication channels with the authorities, helped to fill in any gaps and work towards a common approach.

Sifting through and analysing the submitted information has been a massive job for the European tax authorities. It’s not the same as FATCA, CRS or VAT reporting, where they are mostly checking names and numbers – with MDR there’s also the written explanations of each structure, which are submitted in a free text format. It’s therefore been tougher, and more expensive, for the authorities to implement any type of time-saving automated analysis of the information.

The good news is that this first round now acts as a precedent; a working template that companies and intermediaries can follow next time around. We expect the European tax authorities to perhaps introduce some new fields and filters to further refine the process.

The critical next steps

Despite the completion of the first reporting round, there’s no time to rest. Intermediaries, or the relevant taxpaying companies where no intermediary is involved, are now obliged to maintain the ongoing monitoring of CBAs, with reporting required within 30 days of identifying a new reportable CBA.

As such, it’s crucial that multinationals or companies involved in cross-border activities ensure that they have robust processes in place that encompass monitoring for potential CBAs, analysis of those CBAs, and then appropriately reporting them.

It’s important to be aware of what’s in scope with MDR, with the penalties for failing to report the right information on time likely to be hefty. While the penalties will likely differ by jurisdiction, the directive stipulates they will be “effective, proportionate and dissuasive.”

In order to remain compliant with this demanding regulation, companies need to either maintain proper governance and establish rigorous internal processes, or else find the right partner who can help to monitor and identify new reportable CBAs in real time.

Talk to us today

At TMF Group, our global entity management professionals are continuously monitoring evolving MDR developments so that we can help you to stay ahead of the curve and keep regulatory surprises to a minimum.

Our global network of experts can help you to identify and catalogue CBAs across your entire global footprint, then assess the scale and distribution of the resources you need to become, and remain, compliant with MDR regulations.

To find out more about how we can support your business, make an enquiry today.

Written by

Rodrigo Calleja

International Head of Regulatory & Compliance Solutions

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