MDR: the definition of the main benefit criterion

From this article you will learn:

• Why the main benefit criterion matters when reporting arrangements under MDR;
• When a reportable arrangement meets the main benefit criterion;
• How Tax Ordinance defines tax benefit;

The main benefit criterion constitutes a vital element of reporting arrangements under MDR that can be identified by certain general hallmarks. Under the provisions of the Tax Ordinance, if the main benefit criterion is not met, what we deal with is in fact not a reportable arrangement – even if the arrangement bears one of the hallmarks. So what is the main benefit criterion and how to verify it?

What is the main benefit criterion?

The main benefit criterion is met if – in light of the existing circumstances and facts – we may assume that an entity, acting reasonably and guided by lawful objectives other than achieving a tax benefit, could reasonably take a different course of action, one that would not involve obtaining a tax benefit (reasonably expected or resulting from the implementation of the arrangement), and the tax benefit is the main or one of the main benefits that the entity expects to achieve as a result of the implementation of the arrangement.

This means that the main benefit criterion is met if these three premises occur jointly:

• The course of action taken by the taxpayer brings them a tax benefit,
• Achieving a tax benefit was a considerable (or main) reason for taking a given course of action,
• There is an alternative course of action that leads to exact same economic results but without giving rise to a tax benefit.

In the light of the above, it is also vital to know how a tax benefit should be understood. Under the basic definition to be found in the Tax Ordinance, a tax benefit is:

a) no tax liability arising, postponing the moment when tax liability arises or reducing its amount,
b) creation or overstatement of tax loss,
c) creation of an overpayment or the right to a tax refund or an overstatement of the overpayment or tax refund,
d) no obligation to charge tax by the withholding agent if it results from the circumstances indicated in point a.

However, Tax Ordinance regulations on MDR stipulate two additional cases which, when they occur, should be understood as obtaining a tax benefit:

a) increasing the amount of the surplus of input VAT over output VAT, pursuant to the VAT Act, to be carried forward into a following reporting period,
b) no obligation arising or postponing the arising of the obligation to prepare and submit tax information, including information on reportable arrangements.

Consequently, when verifying whether a tax benefit has occurred, we should take into account both the basic definition of a tax benefit as well as the specific definition that takes into consideration reportable arrangements. 

How to check if an arrangement meets the main benefit criterion?

To be able to verify if the main benefit criterion has been met, we should consider the following  conditions:
 

1. Tax benefit
   First, we must verify whether, as a result of implementing the arrangement, the taxpayer obtains a tax benefit, as stated in the definition. If there is no tax benefit associated with the implementation of the arrangement, this condition will not be met. 
    
2. Alternative course of action
   This condition will be met if, based on the existing circumstances and facts, it can be assumed that the entity acting resonably (and applying lawful solutions) cannot take – or could not take – an alternative, rational course of action, even if the action eventually brings them a tax benefit. 
    
3. Tax benefit was the main or one of the main benefits 
   Tax benefit is the main or one of the main benefits if it constitutes a substantial (or determining) factor behind the decision to implement the arrangement and is not merely a side or unexpected effect of the arrangement. Therefore, the main benefit criterion will, as a rule, be met in cases where the arrangement would not have been implemented if it had not been for the expected tax benefit. 
    

Importantly, for the main benefit criterion to be considered fulfiled, all of the above conditions must be met jointly. 

Thus, if a given arrangement has at least one general hallmark, to be able to discern if it constitutes a reportable arrangement, we should check whether the main benefit criterion has been met.