The new regime on mandatory disclosure essentially obliges promoters and in-house tax departments to give details of certain tax-related transactions to the Revenue Commissioners explaining how those transactions are intended to work. The information has to be provided within tight timescales (generally 5 working days for promoters or 30 working days for in-house users) and severe penalties apply for a failure to meet one's disclosure obligations. The regime is now effective and applies as and from 17 January 2011.

Readers will recall that implementation of the rules was deferred subject to a period of consultation. My previous article in the November edition of this journal commented on Revenue's initial draft regulations and guidance notes and in particular, the aspects of the regime which were causing concern and in respect of which greater clarity and certainty were needed. In light of the consultation process, a number of modifications have since been made to the rules and Revenue's initial guidance notes have been significantly expanded upon.

This article is intended to provide an overview of the regime as it now applies to promoters, focusing in particular on outcomes of the consultation phase, i.e. the changes and improvements that have been made to the workability of the regime.

As already noted the regime is now up and running and applies to certain tax-related transactions from 17 January 2011 onwards. The obligation on a promoter to report to Revenue is triggered when a transaction is marketed to a client or potential client or is made available for use by a client. Once triggered, a disclosure must be prepared and submitted within 5 working days of that time. Transactions that are designed “in-house” by taxpayers need to be reported within 30 working days of the trigger date, being the time at which implementation of the transaction first commences. Although the rules apply to transactions from 17 January, a transitional period of 3 months has been provided so that the first disclosures do not have to be made until 15 April 2011. Thus, tax professionals and in-house tax departments have been given a 3 month window in which to familiarise themselves with the final rules and consider their potential application in their day-to-day work.

What transactions need to be disclosed?

The transactions affected are those that have as a main benefit the obtaining of a tax advantage and which possess certain features as set out in the Regulations. There are eight transaction features or ‘Specified Descriptions’ identified in the Regulations and can be categorised into two types: the first type is the generic categories of Confidentiality, Fees and Standardised Tax Products. Taken together, these categories are intended to capture ‘new and innovative’ tax planning that Revenue considers unacceptable. The second type captures schemes which give rise to particular types of tax advantage and are perceived as ‘high risk’ areas which Revenue are most concerned with. In light of the consultation phase, Revenue has substantially revised its guidance in respect of the eight categories so as to clarify a number of important issues which were previously uncertain or causing concern. The main changes can be summarised as follows:

Generic

1. Confidentiality – The revised guidance emphasises that this test does not ask what another promoter may do; what Revenue knows, or how Revenue, the Minister for Finance or the Oireachtas may react if they knew about the scheme. Rather, the test is applied by asking whether there a desire to keep the planning confidential from competitors (to maintain a competitive advantage) or from the Revenue (to enable continued or repeated use of the scheme)? Confidentiality from Revenue is defined as being ‘at any time’ and not just when the tax returns are being made. If the answer is ‘yes’ then, the tax planning is ‘specified’ and therefore potentially disclosable. A welcome exclusion has been provided however for any tax planning that is already known to Revenue or is ‘reasonably well known’ in the tax community, as evidenced by generally available technical guidance notes, articles, case law etc.

2. Fees – Initially, there was some concern expressly as to how this category should be applied in practice, given that it is a notional test based on a hypothetical question. Helpfully, the revised guidance clarifies that the test should be applied from the perspective of a client who is experienced in receiving tax advice or other services of the type being provided. Essentially, a promoter needs to ask himself whether the tax planning would appear so valuable to a hypothetical ‘savvy’ client that any adviser would be able to recover a ‘premium fee’ if he chose to charge one. The revised guidance also clarifies that in practice, a fee charged or calculated purely on the basis of “scale rates” or “time and materials” would not usually constitute a “premium fee” nor would a fee be a “premium fee” solely on account of factors such as the adviser's location, the urgency of the advice being sought, the size of the project involved, or the skill or reputation of the adviser concerned.

3. Standardised Tax Products – It has been clarified that this category targets ‘finished products’ (often otherwise described as “shrink-wrapped” or “plug-and-play” schemes) rather than packages of proposed arrangements and additional services. Helpfully, the guidance also provides that precedent documents which a promoter maintains on an internal database would not, in the normal course, be caught under this category.

Specific

4&5. Loss Schemes for Individuals and Companies – Categories 4 and 5 both target specific types of loss-planning transactions, the former applying to individuals and the latter to companies. The guidance in relation to both categories has remained broadly the same as that which was outlined in the initial draft notes and no substantive changes have been made. To recap, the category applying to individuals is intended to capture specific types of loss creation schemes that are designed to create a tax advantage for multiple (usually high net-worth) individual participants, whereas the category applying to companies is geared towards types of innovative loss-buying schemes that seek to free-up losses that would otherwise go unrelieved. Note however that the use of standard loss relieving provisions in the tax legislation, such as group relief would not be caught.

6. Employment Schemes – The scope of this category is wide and the related guidance notes have not been expanded upon beyond what was outlined in the initial draft guidance. It applies to transactions designed to create a tax advantage for either an employee or an employer by reason of an employee's employment. Thus, particular care needs to be taken when providing any employment-related tax advice, either to an employer or an individual employee.

7&8. Income into Capital and Income into Gift Schemes – Again, the guidance notes have not been expanded in respect of these categories beyond what was already outlined in the initial draft notes. It is self-explanatory what these categories are intended to capture: types of transactions that seek to convert income into capital or a gift so as to minimise income tax by having the receipt treated as capital gain or gift chargeable at the lower capital gains tax or gift tax rate respectively in lieu of an income receipt otherwise chargeable at the higher income tax rates.

Exclusions for ‘ordinary day-to-day tax advice’ and ‘routine’ tax planning

Whilst the regime is clearly very wide in its scope, it is encouraging that Revenue's revised guidance opens with a statement that the rules “do no impact on ordinary day-to-day tax advice between a tax adviser and a client or on the use of schemes that rely on ordinary tax planning using standards statutory exemptions and reliefs in a routine fashion for bona fide purposes, as intended by the legislature.” Moreover, an illustrative list of transactions which would in Revenue's view, constitute “ordinary day-to-day tax advice” and “routine” tax planning has been complied and appended to the revised Revenue guidelines. Unfortunately however, the examples given are overly simplistic and not particularly helpful: the examples (such as advising on the stamp duty rates that exist, or on the tax implications of a marital breakdown) fail to recognise that in practice, a tax professional is often faced with complex commercial situations when asked to provide tax advice and is typically required to consider and understand the interaction of many different legislative provisions in the context of advising on any particular transaction.

Conclusion

The revised guidance states that “the tax advice given by most tax advisers to clients” would not be subject to the regime. Indeed, the Minister for Finance, in announcing the regulations commented that “it is not the intention of the rules to stop tax advisers advising clients in the normal way on their tax affairs and on the use of the various legitimate tax incentives that are provided for in the tax code. The vast majority of tax advisers giving routine day-to-day tax advice to clients have nothing to be concerned about and won't be affected by the disclosure rules.”

The Minister for Finance also stated that he was referring the issue of legal professional privilege to the Attorney General for review and consultation. A successful conclusion to this process is critical to ensure that all taxpayers have the same rights, and to ensure that the legislation is not used for an anti-competitive advantage or that it is simply contrary to EU law in this area.

Notwithstanding, the assurances referred to above, the possible application of the rules must be considered in relation to all tax-related transactions from now on. Given the government's stated commitment to “tackling aggressive tax avoidance schemes”, it vital that tax professionals act now in relation to their disclosure obligations. Advisers and in-house tax departments were given 3 months in which to fully comprehend the new rules and to finalise their internal mechanisms for determining whether a disclosure needs to be made – the first disclosures must be filed with Revenue by 15 April 2011.

Grace Brennan is a Tax Manager with KPMG

Email: grace.brennan@kpmg.ie