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New EU tax clampdown will force compliance costs, new systems on banks

A new European Commission directive that seeks to curb the "tremendous" problem of tax evasion and avoidance by bank clients is likely to impose additional compliance costs and new reporting systems on banks and other intermediaries.

The proposal, which comes in the wake of the 2016 Panama Papers revelations as well as growing scrutiny of banks' own tax affairs in parts of Europe, will oblige intermediaries to report to national tax authorities all tax avoidance assistance they give to clients, several European Parliament sources told S&P Global Market Intelligence.

Intermediaries affected include banks, accountants and lawyers, said Catherine Olier, a European Parliament economic and financial affairs adviser. "The Commission seems to [be showing] some political will at the moment, at least on the necessity of transparency for schemes promoted by intermediaries," said Olier. The European Commission's view is that "banks indeed play a key role in the tax avoidance business."

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European Taxation Commissioner Pierre Moscovici.

Source: Associated Press

European Taxation Commissioner Pierre Moscovici prefers a "hard law" approach including fines and disciplinary measures to a "soft law" method such as a code of conduct, said Petr Ježek, a Czech Member of the European Parliament and joint co-rapporteur of the European Parliament's Committee of Inquiry into Money Laundering, Tax Avoidance, and Tax Evasion, or PANA.

"This is a tremendous problem," Moscovici told a PANA meeting May 4. He warned the directive would cover all intermediaries, all "harmful or potentially harmful" tax practices, and all jurisdictions. "2017 will be a year of progress against tax evasion. The fight for transparency hasn't been won yet," he said.

Nils De Neubourg, a parliamentary assistant who works on the matter, said the commission is expected to publish the proposal by early July. He confirmed it would contain a clause requiring "mandatory disclosure."

UK influence waning

"The measure suggests a more hardline direction for EU policy with the diminishing influence of the U.K.," said Richard Teather, a senior lecturer in taxation at the University of Bournemouth.

"There's a lot of tax changes supposed to be coming through the EU at the moment. With the U.K. going, so not putting the brake on these things, they've a lot more chance of being passed."
The compliance costs and possible legal risks to banks will likely be "substantial," said one observer.

"Banks will likely introduce compliance measures including firewalls to ring-fence tax-related discussions, narrow the field of compliance and reporting, and introduce systems and processes to capture the relevant information and categorize it," said a City of London finance director who asked not to be named.

"All of this will be expensive and onerous," he said. "There will be enhanced risks of inadvertent [breaches] of confidentiality through over-disclosure, or of under-disclosure through overzealous application of confidentiality rules If these rules exist only in the EU, it would add to the pressures for [intermediaries] to move elsewhere."

The measures drawing banks into policing the tax affairs of firms and wealthy bank clients reflect a "more hostile" EU approach to "aggressive tax policies," said James Charles Stewart, an economics professor at Trinity College Dublin.

A last-minute introduction into the EU's 2013 Capital Requirements Directive IV introduced country-by-country reporting requirements, or CBCR, meant to increase transparency about where banks themselves pay tax.

Banks' own tax rates highlighted

Starting with annual reports published in 2016, all banks based in the EU have been obliged to report their profits and tax on a country-by-country basis.

Data released in 2016 by an investigative committee drawing on the CBCR disclosures showed tax avoidance measures in 2015 cost EU states at least €109 billion in tax revenue.

Among those the CBCR data picked out was Barclays Plc, which reported a €557 million profit in Luxembourg but paid only €1 million in tax.

Ireland is another such low-tax jurisdiction: 16 of the 20 largest European banks by assets operate there, according to the data, collectively paying tax at an effective rate of under 6%. On average, Barclays, Royal Bank of Scotland Group Plc and Crédit Agricole SA paid tax at a rate of 2% in Ireland.

The PANA committee held a number of hearings this year on the CBCR data, as well as hearings on revelations that emerged from the Panama Paper leaks to bolster support in the European institutions for more stringent measures.

The Panama Papers highlighted banks' role in setting up offshore companies in tax havens for clients, said Olier. Advocates in the European Parliament of a mandatory disclosure regime frequently cited the papers. Olier pointed, as an example, to the allegations, later denied, that Société Générale SA liaised with Panamanian law firm Mossack Fonseca on behalf of clients to set up offshore structures and circumvent tax.