Tax and professional secrecy

Big news stories nearly always have a lawyer angle.

For instance, last week was tax week. Not only did Google dominate the headlines with its handful of coins thrown into the chancellor’s reluctantly outstretched hand, but the European Commission announced its own anti-tax avoidance package.

Tax lawyers will want to crawl through every line of the package’s constituent parts: the draft anti tax avoidance directive, the revision of the administrative cooperation directive, the recommendation on tax treaties, the communication on an external strategy for effective taxation, and the study on aggressive tax planning. As for the rest of us, we can sigh with relief.

That is not only because we don’t have to read it all (which is a bonus) – but because, buried in its complex measures and jargon-laden wording, is Annex 1 to the fact sheet that the commission published as background to the package. And Annex 1 has good news for us. To explain why, here is more background.

Annex 1 outlines the EU’s response to the OECD’s base erosion and profit shifting (BEPS) project, which aims to deal with aggressive tax avoidance by multinational companies. I have written about this before, and in particular about Action 12 of the BEPS project, which covers mandatory disclosure rules in cases of tax avoidance.

In brief, there is a danger arising out of Action 12 of BEPS that lawyers, when acting as tax advisers, will be obliged to disclose schemes on which they have advised, in breach of professional secrecy, even though these schemes may be perfectly lawful.

That is because two models are proposed by the OECD, whereby either the promoter of the scheme and the taxpayer have to disclose, or whereby one or the other has to disclose (with tax advisers, including lawyers, deemed to be promoters of the scheme under the very wide definition given).

The OECD clearly recognises professional secrecy as a ground for exempting the promoter from disclosure. But, despite lobbying on this point, its final version of Action 12 still maintains a crude and largely common law view of professional secrecy.

It does not, for instance, recognise the civil law principle of the client not being allowed to waive professional secrecy, nor the rule in some countries that disclosure of the name of the client is a breach, nor the rule that disclosure of documents prepared in the course of a transaction may be a breach in other countries. So the whole gamut of professional secrecy as understood around the EU is not explicitly covered.

This is not so academic as it sounds. The plenary session of the European Parliament at the end of November 2015 passed a resolution drafted by its special TAXE committee on ‘tax rulings and other measures similar in nature or effect’, which had the following chilling paragraph on this point (again, despite lobbying to the contrary): ‘165. Requests that the commission urgently assess the possibility of introducing a legislative framework providing for sufficient sanctions for firms, banks, accountancy firms and financial advisers proved to be involved in implementing or promoting illegal tax avoidance and aggressive tax planning; stresses that these sanctions should have a deterrent effect and may include, among others, fines, barring access to funding from the EU budget, prohibition of any advisory role in the EU institutions and, in extreme and repeated cases, the revoking of business licences.’

The revoking of business licences! By whom? Governments? Since when can governments revoke solicitors’ practising certificates? You can see that a populist storm is rising over the role of tax advisers, and that the battle for professional secrecy needs to be maintained at full throttle.

And that is where I come back to the sigh of relief for lawyers mentioned earlier. Buried in Annex 1 of the fact sheet is the commission’s response to BEPS Action 12 and mandatory disclosure rules. It says: ‘The commission will keep the issue under review, as part of its tax transparency agenda.’ So for the time being - despite tax avoidance by multinationals being the topic de jour - the commission is not following the wilder populist demands, and professional secrecy should be safe.

This is despite the commission usually being the OECD’s most eager acolyte and implementer (see its response over the years to the OECD’s recommendations on money laundering through the Financial Action Task Force).

But the matter is not over. The commission may change its mind in due course. Every day, it seems another aspect of professional secrecy is under attack. We lawyers must remain vigilant.