Lawyers and tax avoidance – beware future dangers

Lawyers can be relieved by the detail of the proposals published by the European Commission this week on dealing with tax intermediaries and tax avoidance. They were hailed by the commission as ‘tough new transparency rules for intermediaries – such as tax advisers, accountants, banks and lawyers – who design and promote tax-planning schemes for their clients’, applicable only in cases of cross-border tax-planning schemes.

They are an improvement on the OECD’s BEPS Action 12 on which they are based. Legal professional privilege is fully respected.

The EU has decided to use a directive for its proposals, after considering a range of options. One of the options was ‘an EU Code of Conduct for intermediaries (non-binding instrument) for certain regulated professions’. That would have raised hackles and legitimate reservations, because a general principle of an independent legal profession is that the state does not draw up codes of conduct for its members. In addition, we can also reasonably suspect that the provisions of such a code would not have been to our taste.

The draft directive’s provisions on lawyers place a duty on member states to take measures to give lawyers the right to a waiver from filing information on a reportable cross-border arrangement (or series of such arrangements) where we are entitled to legal professional privilege under the national law of our member state. In such circumstances, the obligation to file information becomes the responsibility of the taxpayer, and lawyer intermediaries must inform taxpayers of this responsibility.

As to how the scheme will work, intermediaries will have to report cross-border tax-planning arrangements designed or promoted by them if the scheme bears any of the features or ‘hallmarks’ defined in the proposed directive (see below). The report must be made to the tax authorities within five days of handing such an arrangement to the client. Member states must frame proper penalties for intermediaries who fail to meet the reporting requirements.

Member states will automatically share this information with all other member states on a quarterly basis through a centralised database. There will be a standard format for the exchange of information, including details on the intermediary, the taxpayer(s) involved and features of the tax scheme. The commission will have access to certain aspects of the information exchanged between member states, in order to monitor implementation of the rules.

As for the hallmarks, they include arrangements which:

• involve a cross-border payment to a recipient resident in a no-tax country;
• involve a jurisdiction with inadequate or weakly enforced anti-money laundering legislation;
• are set up to avoid reporting income as required under EU transparency rules;
• circumvent EU information exchange requirements for tax rulings;
• have a direct correlation between the fee charged by the intermediary and what the taxpayer will save in tax avoidance;
• ensure that the same asset benefits from depreciation rules in more than one country;
• enable the same income to benefit from tax relief in more than one jurisdiction;
• The EU can change this list in the future to reflect new circumstances.

The proposal will obviously apply to us for so long as we are in the EU, supposing that the legislation passes before the Brexit cut-off date. After Brexit, we lawyers will not in any case have to worry. The legislation will continue to cover clients based in the EU, but in these circumstances, the EU-resident individual or company receiving the advice will have the obligation to notify.

There is a dangerous drawback to our good news. I have focused on it repeatedly recently. We need to be careful when the special rules we claim for lawyers permit us too many exemptions from socially useful legislation. We ask all the time for exemption from rules because of legal professional privilege. Recent examples are the anti-money laundering provisions, proposals for compulsory registration with governmental lobbying and transparency registers, and now tax avoidance. Of course, I know the reasons behind our claims, and have advanced them myself many times. But our stance does not go down well in populist times when politicians are trying to implement rules to make society fairer.

So, when the European commissioner introduced the new measures, he said: ‘We are continuing to ramp up our tax transparency agenda. Today, we are setting our sights on the professionals who promote tax abuse … Our work for fairer taxation throughout Europe continues to advance.” Who could be opposed to that? Yet an exception was made for lawyers.

Politicians are muttering ‘enough is enough’. We escaped this time. But for how much longer will we be treated as a special case, when the popular argument for action on a particular matter is so strong?

Jonathan Goldsmith is a consultant and former secretary-general at the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs