News analysis: Portuguese disclosure obligations regime

The Portuguese annual budget law for 2007 granted legislative authorization to the Portuguese government to approve a regime for the disclosure of information regarding the proposal or adoption of aggressive tax planning structures.

The Portuguese annual budget law for 2007 granted legislative authorization to the Portuguese government to approve a regime for the disclosure of information regarding the proposal or adoption of aggressive tax planning structures. A regime detailing the authorization has been drafted and submitted to the Parliament for approval.

This article analyzes the contents of the proposal, the terms and conditions under which the regime is expected to apply, as well as the impact the regime would have on Portuguese tax advisory activity and on the tax planning projections to be adopted by Portuguese companies.

Proposed Regime

Scope

According to the proposed regime, any proposed schemes, recommended strategies, recommended acts, and executed transactions that have as an exclusive or predominant purpose to obtain fiscal advantages, will be subject to communication, information, or disclosure obligations.

The regime will apply to tax planning acts in which tax advantages are expected to be obtained, by any means, totally or partially, regarding corporate income tax (IRC), personal income tax (IRS), value added tax (IVA), real estate transfer tax (IMT), property tax (IMI), and stamp tax (IS).

Definitions

For the purposes of the regime, the following definitions apply:

• tax planning: any scheme determining, or expected to determine, by an exclusive or predominant mean, a fiscal advantage by a taxpayer;
• scheme: any operation, plan, project, proposal, advice, instruction, or recommendation provided either expressly or tacitly, and whether the object of a specific agreement, contract, business or set of businesses, promise, settlement, collective, or company structure, with binding nature or not, unilateral or plurilateral, as well as any other juridical or material proceeding performed, to be performed, or in course of being performed;¹
• tax advantage: a reduction, elimination, or deferment of tax due, or the possibility to obtain a tax benefit that would otherwise fail to be obtained without the use of a scheme; and
• promoter of a tax planning scheme: any entity with or without legal personality, resident, or established in any part of the Portuguese territory, who, in the context of its economical activity renders, with or without remuneration, support services, consultancy, advising, or similar services, regarding the tax status or fulfillment of tax obligations to which clients or third parties must comply.

The regime considers the following entities as promoters: credit institutions and other financial entities; statutory auditors (revisores oficiais de contas), and statutory auditors firms (sociedades de revisores oficiais de contas); lawyers, law firms, solicitors (solicitadores), and solicitors firms; chartered accountants (técnicos oficiais de contas), and other entities rendering accountancy services.

Information Obligations

The proposed regime says any promoter should inform the Portuguese tax authorities (Direcção-Geral dos Impostos), of any tax planning scheme conceived, proposed to, or adopted by, any of its clients. The communication should be made by the promoter within 20 days after the month in which the tax planning scheme was first conceived, proposed, or adopted.

Whenever the tax planning scheme is not conceived, proposed, or publicized by a promoter, or when the promoter is not resident or established in the Portuguese territory, the scheme must be communicated by the client by the end of the month following the one in which the scheme is adopted. Only collective bodies, entities without legal personality, and individuals (under specific conditions) are liable to the mentioned obligation.

Communication regarding operations made with entities resident in favorable tax regimes or transactions involving financial or insurance operations, namely leasing, hybrid financial instruments, derivatives, or contracts on financial instruments, that are likely to determine a requalification of the income or the change of beneficiary, and that determine or are expected to determine tax advantages, should be communicated before being presented or proposed to the client and within 10 days after its conception.

The following information must be communicated:

• detailed description of the tax planning scheme, including an indication and characterization of the type of business, company's structure, operations and transactions used, as well as species and configuration of the intended tax advantage;
• disclosure of the legal provision to which the tax advantage refers;
• disclosure of the presumable gain implied in the tax advantage obtained;
• information on whether the scheme was conceived or elaborated by the promoter's initiative or on previous request by the client;
• indication of the number of times in which the scheme was proposed or adopted and the number of clients that are considered, or acknowledgement that the scheme is being used for the first time; and
• name, address, and tax identification number of the promoter.

It is also established that the accomplishment of the obligations established by the regime would overcome any professional privilege to which the promoters are legally bound.

The disclosure obligation would not include the names or any other identification of the clients.

Further, the information rendered under the regime would not breach any confidentiality obligation, nor would it imply any responsibilities to whoever renders the information.

Penalties

According to the terms set forth in the proposed regime, a penalty ranging between €5,000 to €100,000 (for collective entities) and €1,000 to €50,000 (for individuals) would likely apply when no communication is made or the communication is made after the established legal deadline or when there are omissions or irregularities regarding the information provided to the Portuguese tax authorities.

Other penalties could apply if further information (as requested by the Portuguese tax authorities) is not granted or is granted after the established legal deadline.

Further, other ancillary penalties could apply, namely: the loss of tax benefits that were granted (even when the tax benefits are granted automatically) or inability to obtain them; and public advertisement of the application of the condemning decision, at the expenses of the entity that failed to comply with the obligations.

Regime's Impact

In the authors' opinions, the application of the proposed regime may lead to legal uncertainty, excessive disclosure, and excessive bureaucracy.

In fact, the broad application of this regime will lead to a high degree of legal uncertainty considering that because of the wide concepts the regime adopts, all entities trying to apply it would be left to wonder exactly which type of transactions are not required to be disclosed. In reality, the terms in which the regime is drafted leave few transactions out of its scope.

For example, a communication obligation may be considered to exist under the regime when a tax consultant advises its client to use an applicable double taxation treaty, or when a simple advice is rendered to an individual client on whether to adopt a final withholding tax on an item of income obtained or to include it together with the remaining income.

On another perspective, if a company holds real estate property, a simple consideration of the tax implications related to an asset deal or a share deal when winding up a structure is required (and the simple advice on which alternative to adopt due to tax reasons) would henceforth have to be thoroughly detailed and explained to the Portuguese tax authorities.

Those simple examples provide an overview of the broad scope of the regime leading to legal uncertainty of promoters or clients.

Also, the legal uncertainty leads us to another consideration: taxpayer overdisclosure if there is no determination of the exact boundaries of the regime. If the Portuguese tax advisers and taxpayers are not aware of the scope of the regime, chances are that to safeguard their position against the high applicable penalties, they will start disclosing all transactions made as of the date the regime begins to apply.

To some extent, the possible consequence of overdisclosure would entail yet another negative implication, which is the excessive bureaucracy at the level of the promoters, as well as at the level of the clients (when the disclosure obligation applies). In other words, possibly more time will be spent in drafting the communications than in interpreting laws and rendering advice to clients.

The comments above create the need to amend the proposed regime on the basis of a list of transactions for which communication would be required. That list could be composed of some categories of transactions that usually have a bigger degree of complexity or by considering some thresholds on the amount of the transactions (for example, only above a certain amount of tax advantage obtained, as necessary to inform the Portuguese tax authorities).

Needless to say, an amendment regarding the use of professional secrecy privileges would also have to be assured.

International Approach

The experience and practice in other countries (specifically, the United States and the United Kingdom) should also be considered by the Portuguese legislator.

U.S. Approach

According to the U.S. model, disclosure is required on a number of reportable transactions,² and professionals have to maintain lists of all reportable transactions on which they give tax related advice for a significant fee.

However, according to experience gained, the U.S. Internal Revenue Service proposed amendments of the rules in force based on the following reasons:

• the disclosure obligations were described so as to cover transactions that are potentially abusive and transactions that should not be deemed to be abusive; and
• taxpayers' overdisclosed transactions (even if they were not questionable), to make sure they were not subject to the penalties imposed.

In this sense, amendments were adopted and exceptions were also introduced, namely: when the tax adviser provides advice in the capacity of an employee, shareholder, or partner of the taxpayer; the tax statement is in documents filed publicly with the Securities and Exchange Commission; and when the tax adviser provides postfilling advice (that is, provided after the taxpayer files the tax return on which the taxpayer first claims the tax benefit).

From a Portuguese standpoint, the U.S. experience is relevant to understand that the tax authorities should have a proactive concern on the practical implications of the regime that is in force.

U.K. Approach

The U.K. regime contains a disclosure obligation whereby the promoter of a scheme or arrangement is required to disclose the scheme to the U.K. tax authorities only if one of the specific hallmarks³ of tax avoidance is deemed to occur (disclosure regimes also apply for VAT and stamp duty).

If a scheme or arrangement falls within any of the hallmarks and its main purpose or one of its main purposes is to avoid tax, a disclosure obligation is triggered.

That means that any scheme relating to any aspect of income tax, corporation tax, or capital gains tax avoidance is potentially subject to disclosure obligations. Nevertheless, the U.K. regime provides for several limitations that in practice lead to a reasonable (more reduced) level of disclosure obligations.

That fact should also be considered by the Portuguese tax authorities to limit the scope of application of the proposed regime.

On the other hand, the U.K. regime also takes into consideration legal professional privilege. In fact, where an adviser who would ordinarily be a promoter is hindered, by professional privilege, to provide information for the purposes of disclosure, the adviser has no obligation to do so (the person who uses it is required to make the disclosure, although there is a right to waive to the professional privilege).

Final Remarks

The proposed regime sets forth broad concepts detailing the need to disclose potentially tax aggressive transactions. This will likely lead to legal uncertainty, overdisclosure, and an excess bureaucracy.

The terms of a new regime could consider transactions only on the basis of complexity or on a basis of the amount of tax advantage obtained.

International experience in these matters, namely the U.S. and U.K. experience, should be considered in detail, namely, the existence of reasonable exceptions to the rules in force, professional privilege, and a proactive approach in discussing the implementation of those regimes with the tax advisers and taxpayers.

FOOTNOTES

¹ The following are always considered to be tax-planning schemes: (1) transactions implying the participation of an entity subject to a favorable tax regime (as per the list approved by the minister of finance); an entity not subject to an income tax identical or analogous to Portuguese personal income tax or Portuguese corporate income tax, or an entity whose effective tax rate is equal or lower than 60 percent of the tax that would be due if the company were resident in the Portuguese territory, or with any other entity totally or partially exempt; and (2) transactions involving financial or insurance operations, namely leasing, hybrid financial instruments, derivatives, or contracts on financial instruments that are likely to determine a requalification of the income or the change of beneficiary that determine or are expected to determine tax advantages.

² These transactions are: listed transactions; confidential transactions; transactions with contractual protection; loss transactions; transactions with significant book-tax differences; and transactions involving a brief asset holding period. These categories are further detailed with lists of transactions that are deemed to fall into each category.

³ The hallmarks are: confidentiality where a promoter is involved -- this applies if any promoter of the scheme wishes to keep details of the scheme confidential from other promoters (to an extent beyond ordinary client confidentiality); confidentiality in cases not involving a promoter -- this applies if a promoter concerned wants to keep any element of the scheme confidential from HM Revenue & Customs; premium fee -- this applies if any promoter charges a premium fee, namely a fee that is calculated by reference to the tax advantage obtained; off-market terms -- this applies to financial products only, if the terms differ markedly from market terms; standardized tax products -- this applies to mass-marketed schemes implemented with minor modifications; loss schemes -- this applies to loss creation schemes; and leasing arrangements -- this applies to "double dip" leasing transactions, where capital allowances can be claimed with no corresponding charge to corporation tax.