14th October 2019

Mandatory Disclosure Rules – the regulatory onslaught continues

Nina Mileksic, Compliance Product Manager at Microgen, discusses new Mandatory Disclosure Rules (MDR) that aim to further the battle against tax avoidance.


Life after CRS tax reporting 

Paying tax  how much of it and where – has been at the core of a global debate for a few years. It can be a controversial topic and the answers to questions posed seem all but straightforward. 

Policing tax contributions of individuals and companies can be challenging. So, in 2014 the OECD decided to tackle the human aversion to paying tax by developing a framework, where the financial institutions play a key role in collating and reporting relevant data to authorities. Today it is widely known as CRS – the Common Reporting Standard.  

Five years on, CRS is well and truly embedded in many jurisdictions across the globe and has become a normal feature of doing business.  Judging by the latest OECD initiative however, it must have become clear that human creativity in tax matters indeed has no boundsIt transpires that even CRS is avoidable. 

So, where do we go from here?  

Catching the most elusive…can Mandatory Disclosure Rules do the trick? 

Many financial institutions advise their clients on tax matters. They suggest tax arrangements in the best interest of their clients. Considering that the best interest of individual taxpayers may often be at odds with governments’ point of view, we can easily see how the interests of both can end up in conflict.   

OECD’s solution to this conflict of interest is interesting. The OECD does not suggest these arrangements should not be done at all. No. If an intermediary would like to offer this kind of service, they are more than welcome to it. However, they will need to record all these arrangements and report it to the relevant tax authority.  

To achieve that, they introduced a new set of rules called Mandatory Disclosure Rules (MDR). 

The new rules require intermediaries – e.g. lawyers, accountants, financial advisors, banks and other service providers – to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the Common Reporting Standards (CRS), or prevent the identification of the beneficial owners of entities or trusts. 

So, by introducing an obligation on intermediaries to disclose the schemes designed to circumvent CRS reporting, OECD is aiming to deter the use of such avoidance strategies. This is similar to the strategy that the UK’s HMRC have taken for several year’s through their DOTAS approach.

Circumventing CRS – what are Avoidance Arrangements? 

Definition of the avoidance strategies under MDR is very broad.  

They are defined as “an Arrangement where it is reasonable to conclude that it has been designed to circumvent or has been marketed as or has the effect of circumventing CRS Legislation.  

The breadth of the definition demonstrates the depth of OECD’s understanding of how innovative the CRS avoidance products can be.  

To make it more specific, the OECD also lists examples of such arrangements: 

  • the use of products that are technically not financial accounts and hence not under CRS scope, but are in practice similar to them; 
  • transfer of money to types of accounts, types of payments, financial institutions and countries that aren’t covered by CRS, or are exploiting weaknesses of the CRS to prevent identifying the account holder or their beneficial owner (e.g. such as due diligence processes); 
  • the use of offshore structures to conceal the beneficial owner of a financial account (Opaque Offshore Structures) 

Key MDR requirements 

Intermediaries – and in certain circumstances taxpayers themselves – must record and report required information about such arrangements to the relevant tax authorities.  

Information that needs to be reported under the rules includes: 

  • the names, addresses, jurisdictions and Tax Identification Numbers (TINs) of intermediaries or taxpayers making the disclosure;  
  • the details of the Arrangement, including a factual description of the features that are designed to have the effect of circumventing the CRS Legislation.  

The reporting requirements under MDR do not affect CRS reporting. MDR is envisaged as an information gathering tool which seeks to bolster the integrity of CRS by deterring intermediaries and advisors from promoting certain schemes.  

A twist in the plot 

There is a twist to the story though – the rules are not mandatory. They can be adopted by interested countries only.  

As you might expect, the EU was the first to act. In May 2018, the European Commission implemented European Directive (EU) 2018/822 – colloquially called DAC6 – to implement the MDR rules across the EU.  

Member states are required to transpose the Directive into the local law by the end of 2019, with rules being fully applicable from 1 July 2020.  

An interesting aspect of the Directive is that it brings into focus cross-border arrangements between Member States as well as arrangements between Member States and third countries – where mutual exchange arrangements are in place.  

Considering that the rest of the OECD member states seem to still be mulling over the rules and considering their willingness to implement them, we are in for another episode of political drama.  

Friend or foe? 

The start of the next episode seems promising.  

The critics of the MDR rules point out that making the rules optional takes away the edge that the rules would otherwise have had, especially looking at the track record of certain tax havens where even mandatory rules are tweaked and diluted 

How will this play out looking at the clear determination of the EU to implement a strict version of the rules? Will we see another blacklist being drawn up, as we saw in the case of Economic Substance?  The EU certainly understand the pressure they can bring to bear on other international finance centres to implement what they view as ‘best practice’.

And which inclination will prevail  the desire of a government to protect existing business, or to prove its standing in the world as a transparent, trustworthy jurisdiction to do business in?  

Whatever the outcome, the message is clear 

With the MDR rules the OECD is making it explicit that abusing the letter of the law to avoid the CRS reporting requirements is not allowed. Whatever plays out politically, this should at least create some deterrent effect for some people and bigger institutional entities. 

The question of course remains – will the OECD make the MDR rules mandatory in time, as it has been the case in the past? 

Whatever happens in the future, the rules could mean that some intermediaries find themselves in Hamlet’s shoes, asking the fundamental question about the form of their future existence.  

Whether you are a fan of drama or not, this is one to watch closely.  


Will you be impacted by MDR rules? Let us know your thoughts!”, contact us at info@microgen.com

You can find Nina on LinkedIn