The Portuguese government has made a definitive stand against abusive tax planning. A long-awaited regime requiring users or promoters of operations and transactions whose principal objective is to obtain tax benefits to disclose such operations to the tax authorities has finally been enacted by Decree-Law 29/2008 of February 25.
Promoters of abusive tax planning or, the taxpayers themselves, if they carry out the transactions without the help of promoters, must disclose such operations and transactions. Under the new decree, promoters include banks and other financial institutions, accountants, lawyers and auditors. Lawyers and auditors only fall into this category when they act in the capacity of promoters and not when acting simply as legal consultants, or within the scope of their public interest duties.
The new obligation will affect corporate taxpayers and thus their tax directors' normal course of business. Since a promoter is now obliged to disclose a proposed tax planning scheme within 20 days of the end of the month in which it was first proposed, a corporation may decide to implement the proposed tax planning scheme after the scheme has already been disclosed to the tax authorities. The disclosure will be made with reference to the legal transactions envisaged and the tax advantages sought. In spite of this, since the disclosure is made on a no-name basis, the corporate taxpayer's identity will not be revealed.
However, if the tax planning was not proposed by a promoter or at some point implemented by a promoter, or if it was proposed by a non-resident promoter, the disclosure obligation will fall on the corporate taxpayer itself as the user of the tax planning. Disclosure should be made until the end of the month following its implementation. In contrast with situations where a promoter is involved, it will imply disclosure of the taxpayer's identity. Therefore, tax directors should carefully assess the disclosure obligations that might fall on their own corporations when a qualifying tax planning scheme is implemented, and its consequences.
Lawyers benefit from a special regime. The new law clearly states that the definition of promoter's activity does not cover: "Counselling about a tax planning scheme or activity by a lawyer or legal executive or by a firm of lawyers or legal executives in the course of assessing the legal position of the client, within the boundaries of legal consultation, while defending or representing the client in legal proceedings, or in respect of legal proceedings, including counselling on resorting to or avoiding legal action, whether this information has been obtained before, during or after the proceedings, as well as within the scope of other acts carried out by lawyers and legal executives."
Therefore, tax directors should be assured that a legal assessment by a lawyer of an envisaged transaction would not trigger the regime's disclosure obligation. Additionally, although the regime attempts to limit the scope of schemes or activities covered by the disclosure obligations, few of the (so-called) tax planning schemes are likely to fall outside its boundaries.
The abusive tax-planning concept used is wide-ranging. In theory, at least, it is capable of encompassing a scheme or activity that brings about or is hoped to bring about (solely or principally) a tax advantage. Similarly the concept of tax advantage includes the reduction, elimination or deferral of a tax or the obtaining of a tax benefit that would not be obtained, in whole or in part, without recourse to such a scheme.
Nevertheless, the Portuguese legislature restricted the number of tax-planning schemes covered to those that would lead to one of the following situations:
Entailing the participation of an entity governed by a privileged tax regime, defined as an entity whose country of residence is included on the list approved by order of the minister of finance; or when an entity is not liable in such a country for a tax that is identical or similar to personal or corporate income tax, or when the actual tax paid is less than or equal to 60% of the tax due if this entity were resident in Portugal.
Entailing the participation of a fully or partially exempt entity.
Involving financial or insurance-related transactions that may be capable of bringing about a re-qualification of income or a change in beneficiary, namely financial leasing, hybrid financial instruments, derivatives or financial instrument contracts.
Entailing the use of tax losses.
Additionally, regardless of whether one of the above situations applies, any proposed tax planning schemes that include an exclusion or limitation of liability clause to the benefit of the respective promoter will always be subject to the duty of communication.
In spite of the intended limitation, the number of situations covered is so wide that few tax-planning situations have not been contemplated with the corresponding disclosure obligation by the promoter or by the taxpayer.
The scope of the duty is broad and detailed. No provision is made for communicating the identity of the client in cases where the duty falls on the promoters. The penalties for failing to comply with the new duty are also high – €100,000 ($156,410) when conduct is deemed more serious – and scaled according to the gravity of the infringement and the nature of the infringer.
In the case of an omission of disclosure and even when the fine or additional sanction has been paid, the duty will subsist if compliance is still possible. The practical reach of compliance has yet to be determined though.
The new disclosure obligations follow the trend of other legal systems. But the legislation fails to address the costs generated by the creation of exaggerated and ill-defined additional penalties. Neither does it define abusive operations with the due precision and thoroughness. It superimposes the purposes of the new law on values protected by other legal duties, such as the duty of professional secrecy. It apparently strikes at the heart of the appropriateness intrinsic to the constitutional principle of proportionality. So corporations and their tax directors should carefully analyse the impact of the new regime while structuring transactions on their normal course of business that might entail beneficial tax features.
Promoters of abusive tax planning or, the taxpayers themselves, if they carry out the transactions without the help of promoters, must disclose such operations and transactions. Under the new decree, promoters include banks and other financial institutions, accountants, lawyers and auditors. Lawyers and auditors only fall into this category when they act in the capacity of promoters and not when acting simply as legal consultants, or within the scope of their public interest duties.
The new obligation will affect corporate taxpayers and thus their tax directors' normal course of business. Since a promoter is now obliged to disclose a proposed tax planning scheme within 20 days of the end of the month in which it was first proposed, a corporation may decide to implement the proposed tax planning scheme after the scheme has already been disclosed to the tax authorities. The disclosure will be made with reference to the legal transactions envisaged and the tax advantages sought. In spite of this, since the disclosure is made on a no-name basis, the corporate taxpayer's identity will not be revealed.
However, if the tax planning was not proposed by a promoter or at some point implemented by a promoter, or if it was proposed by a non-resident promoter, the disclosure obligation will fall on the corporate taxpayer itself as the user of the tax planning. Disclosure should be made until the end of the month following its implementation. In contrast with situations where a promoter is involved, it will imply disclosure of the taxpayer's identity. Therefore, tax directors should carefully assess the disclosure obligations that might fall on their own corporations when a qualifying tax planning scheme is implemented, and its consequences.
Lawyers benefit from a special regime. The new law clearly states that the definition of promoter's activity does not cover: "Counselling about a tax planning scheme or activity by a lawyer or legal executive or by a firm of lawyers or legal executives in the course of assessing the legal position of the client, within the boundaries of legal consultation, while defending or representing the client in legal proceedings, or in respect of legal proceedings, including counselling on resorting to or avoiding legal action, whether this information has been obtained before, during or after the proceedings, as well as within the scope of other acts carried out by lawyers and legal executives."
Therefore, tax directors should be assured that a legal assessment by a lawyer of an envisaged transaction would not trigger the regime's disclosure obligation. Additionally, although the regime attempts to limit the scope of schemes or activities covered by the disclosure obligations, few of the (so-called) tax planning schemes are likely to fall outside its boundaries.
The abusive tax-planning concept used is wide-ranging. In theory, at least, it is capable of encompassing a scheme or activity that brings about or is hoped to bring about (solely or principally) a tax advantage. Similarly the concept of tax advantage includes the reduction, elimination or deferral of a tax or the obtaining of a tax benefit that would not be obtained, in whole or in part, without recourse to such a scheme.
Nevertheless, the Portuguese legislature restricted the number of tax-planning schemes covered to those that would lead to one of the following situations:
Entailing the participation of an entity governed by a privileged tax regime, defined as an entity whose country of residence is included on the list approved by order of the minister of finance; or when an entity is not liable in such a country for a tax that is identical or similar to personal or corporate income tax, or when the actual tax paid is less than or equal to 60% of the tax due if this entity were resident in Portugal.
Entailing the participation of a fully or partially exempt entity.
Involving financial or insurance-related transactions that may be capable of bringing about a re-qualification of income or a change in beneficiary, namely financial leasing, hybrid financial instruments, derivatives or financial instrument contracts.
Entailing the use of tax losses.
Additionally, regardless of whether one of the above situations applies, any proposed tax planning schemes that include an exclusion or limitation of liability clause to the benefit of the respective promoter will always be subject to the duty of communication.
In spite of the intended limitation, the number of situations covered is so wide that few tax-planning situations have not been contemplated with the corresponding disclosure obligation by the promoter or by the taxpayer.
The scope of the duty is broad and detailed. No provision is made for communicating the identity of the client in cases where the duty falls on the promoters. The penalties for failing to comply with the new duty are also high – €100,000 ($156,410) when conduct is deemed more serious – and scaled according to the gravity of the infringement and the nature of the infringer.
In the case of an omission of disclosure and even when the fine or additional sanction has been paid, the duty will subsist if compliance is still possible. The practical reach of compliance has yet to be determined though.
The new disclosure obligations follow the trend of other legal systems. But the legislation fails to address the costs generated by the creation of exaggerated and ill-defined additional penalties. Neither does it define abusive operations with the due precision and thoroughness. It superimposes the purposes of the new law on values protected by other legal duties, such as the duty of professional secrecy. It apparently strikes at the heart of the appropriateness intrinsic to the constitutional principle of proportionality. So corporations and their tax directors should carefully analyse the impact of the new regime while structuring transactions on their normal course of business that might entail beneficial tax features.
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