EU’s new SAFE initiative to bolster existing tax evasion measures

The European Commission (EC) launched an initiative on 6 July 2022 concerning the fight against tax evasion and aggressive tax planning. As a result, a public consultation introducing the Securing the Activity Framework of Enablers (SAFE) directive has now been held. The proposed measures could increase compliance costs for all those involved in providing tax advice, whether in the targeted area or not. 

Enablers to come under the microscope

For several years, the EC has been tackling the role that enablers, including tax advisers, play in schemes that facilitate aggressive tax planning and tax evasion. The SAFE initiative will coincide with the existing measures in place, namely the Anti-Tax Avoidance Directive (ATAD), which targets taxpayers and the Directive on Administrative Cooperation (DAC6).  The latter requires EU intermediaries to provide information to the tax administrations of Member States on cross-border arrangements, which can potentially be used for aggressive tax planning. Such reports would hopefully allow detailed risk assessments to take place and lead to the closure of loopholes by executing legislation. However, these existing measures target action on the taxpayer and thus they do not cover those that enable such structures.

Tax evasion continues to be an issue

Even though there are several measures in place to tackle tax evasion, it remains a prominent issue.  As detailed in the EU’s ‘Call for Evidence’, tax evasion is estimated at between €35bn and €70bn of lost tax revenues per year.  According to research conducted by the International Consortium of Investigative Journalists (ICIJ) on Panama and Pandora, complex structures often involve shell companies that lead to aggressive tax planning and tax evasion.

The overarching objective of the SAFE initiative, as per the Call for Evidence, “is to prohibit enablers who design, market and/or assist in the creation of tax arrangements or schemes in non-EU countries that lead to tax evasion or aggressive tax planning for the EU Member States”.

Measures under consideration

Three options are now being considered. The first option would require enablers to conduct due diligence on whether a scheme will lead to tax evasion and aggressive tax planning and maintain proper records of such procedures. It will also prohibit them from assisting in schemes that would facilitate tax evasion and aggressive tax planning.

Under the second option, enablers would be required to carry out due diligence outlined in option one. In addition, enablers that provide tax advice and services would be required to register in an EU Member State.  Therefore, only those registered would be able to provide such services in the EU. If enablers are non-compliant, they may be removed from the register.

Finally, option three requires all enablers to follow a Code of Conduct which obliges enablers to ensure that they do not facilitate tax evasion or aggressive tax planning.

Regardless of the chosen policy option, a further transparency measure may be put in place. This would require that EU taxpayers declare in their annual tax returns any participation involving 25% of shares, voting rights, ownership interest, bearer shareholdings or control via other means in a non-listed company located outside the EU.

Key observations and takeaways

While the DAC6 regime provides information on the use of defined tax planning arrangements that could be used for aggressive tax planning or tax evasion, it has no impact on non-EU enablers. The introduction of SAFE resolves this as it would affect non-EU enablers. Points that may be taken into account in developing the SAFE initiative include the implementation of a system following the example set by the US Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions and certain other entities to report on the assets held by their account holders operating within the scope of the EU. This is considered to be an extra-territorial compliance regime. 

Further points to consider include the pending verdicts from the Court of Justice of the European Union (CJEU) on current EU DAC6 cases. Also, consideration of what role the term ‘economic substance’ will play in the definition of aggressive tax planning.  

Cause and effect

The public consultation has led to EU-wide calls to provide more regulation and supervision on the tax profession and unclarified legislation. There is now a call for clear guidelines on tax enablers and what constitutes aggressive tax planning, along with repercussions for such behaviour. Prior to this consultation, the EU considered tax regulation to be the responsibility of the member nations. However, the call for more transparent measurements to be laid out by the EC will allow for a more general methodology and legislation to create resilience to combat the use of aggressive tax planning.

The measures proposed aim to limit the activity of enablers providing tax advice that could result in cases of aggressive tax planning and tax evasion. The options proposed in the consultation focus on measures requiring assessment of whether a structure will lead to tax evasion that involves illegal acts by perpetrators. In one sense any structure might be used for tax evasion, so it seems difficult to determine the dividing line between what might or might not lead to such behaviour. In addition, most EU Member States already have measures to tackle tax evasion and most existing professional bodies to which tax advisers belong already have codes of conduct.

Taking account of the complex issues to consider in any tax planning, the potentially broad scope of the proposed measures requires scrutiny to assess whether they are effective in reducing losses from tax evasion and unacceptable tax avoidance. The effects of the measures will impact many client structures and have additional effects on businesses, individuals and investments.

Call to action – next steps

The public consultation closed on 12 October 2022, following which the EC expect to be able to publish a legislative proposal in the first quarter of 2023.

The associated legislation is relevant to businesses and individuals and, as such, it will be important to track the associated developments, particularly in light of some of the leadership changes at the Organisation for Economic Co-operation and Development (OECD).