Expect tense negotiations over forcing lawyers to disclose the details of tax schemes. But will their outcome matter in light of Brexit?
The European Commission has signalled, in its recent Apple tax ruling over Ireland, that it intends to pursue tax avoidance vigorously.
This is on top of action that the UK government is proposing on its own initiative, as laid out in its current consultation on ‘Strengthening Tax Avoidance Sanctions and Deterrents’.
Of course, the Apple ruling is a case of state aid and competition, involving lawyers only as representatives of the parties, and not as possible promoters of the scheme. But the European Commission is pursuing the tax promoters’ angle just as vigorously.
In July, it laid out the next steps in its campaign to boost transparency, in the light of the problems revealed by the Panama Papers. The role of tax advisers, including lawyers, in promoting tax avoidance schemes is clearly within its sights. As for what actions it will take, it is just sketching out options at this stage.
There will be a public consultation in the autumn.
So another battle is looming on lawyer confidentiality. That is because one of the options being considered at EU level, in the light of the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting project - more specifically the OECD’s BEPS Action 12 - is to require lawyers to disclose details to the tax authorities of lawful tax avoidance schemes on which they have advised clients.
As I have written before, the OECD has an understanding, albeit limited, of the meaning of lawyer confidentiality. But that does not mean that the European Commission will agree with the definition of exclusions from disclosure. Nor does it mean that the UK’s current version of Disclosure of Tax Avoidance Schemes (DOTAS) will end up as the model.
In case you think that none of this matters much I highlight another aspect of the commission’s announcement, which will hammer home what is happening with the information lawyers reluctantly yield up about their clients under the compulsion of the law.
In the same announcement, the commission added that is proposing an amendment to the directive on administrative cooperation in the field of taxation (2011/16/EU) to allow tax authorities to have access to national anti-money laundering information, particularly beneficial ownership and due diligence information.
This is because the commission claims that, in order to spot tax evaders (not avoiders this time), tax authorities should know the ultimate beneficiary behind every company, trust and fund, something not always known to tax authorities. And here I have been fool enough all these years to believe the authorities that the information wrenched from lawyers involuntarily under the original anti-money laundering directives was needed only for money laundering and terrorist-financing crimes.
What should lawyers do in the light of this? There will be tense negotiations. The previous fight some years ago - over the anti-money laundering directives - had only limited success. It was based on a staunch refusal to budge an inch from absolute professional secrecy, and yet lawyers eventually had to begin reporting suspicious transactions.
This time round, it might be more sensible to acknowledge that a breach in absolute secrecy has already taken place, and begin from a line drawn somewhere near the UK’s current DOTAS. We will see.
The commission is not isolated at institutional level. The European Parliament passed a resolution the day after the commission announcement, welcoming - among many clauses - the amendments to the tax administration directive (above), and calling on member states to strengthen the capacity of their tax administrations to investigate cases of tax avoidance.
The parliament will now take tax transparency forward through a special Panama Papers committee of inquiry that it has established. It held its first meeting in July. The first proper hearing is likely to take place this month. Such a committee is the most powerful tool available to the parliament, with power to investigate breaches of EU law by member states and to check if the commission has acted in accordance with its duties.
It has powers to require organisations to hand over documents, and to compel witnesses to give evidence.
We in the UK have DOTAS (and maybe much more in the future after the government’s current consultation). We also have Brexit. So does any of this matter to us, apart from within the very short term while we continue as members of the EU? As with the answer to so many questions nowadays, it depends on what Brexit means.
Full single market access? No access at all? Partial access? Even with no access, it is unlikely that the EU will tolerate a more liberal regime on its borders. For a precedent, just see what happened to bank secrecy and the taxation of EU customers’ deposits in Switzerland.
Regarding the ongoing mystery of the meaning of Brexit, I am reminded of the famous Lord Palmerston quote about the Schleswig-Holstein question in the 19th century: ‘Only three people have ever really understood the Schleswig-Holstein business - the Prince Consort, who is dead - a German professor, who has gone mad - and I, who have forgotten all about it.’
Jonathan Goldsmith is a consultant and former secretary-general at the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs