MDR: general identification marks of tax schemes

From this article, you will learn:

• In what situations it is necessary to meet the main benefit criterion?
• How to verify that an arrangement meets the general identification mark?

From 1 January 2019, the legislator, implementing the provisions of the DAC6 directive into the Polish legal system, introduced the obligation to report MDR (Mandatory Disclosure Rules) tax schemes. It is worth noting here that the Polish regulations regarding MDR included in the Tax Ordinance have a broader scope than the provisions of the EU DAC6 directive.

The role of identification marks in the tax scheme

According to the definition in the Tax Ordinance, a tax scheme is an arrangement that:

1. has a general identification mark and meets the criterion of the main benefit (both these criterions should be met jointly),
2. has a specific identification mark (in this case the arrangement does not even have to meet the criterion of the main benefit) or
3. has another specific identification mark (which also exempts the need to meet the main benefit criterion).
    

So let's take a look at all 11 general identification marks of tax schemes that have been defined in the Tax Ordinance by the Polish legislator.

Discussion of general identification marks: in what situations it is necessary to meet the main benefit criterion?

Art. 86a § 1 (6a) – the promoter or user have undertaken to keep confidential from third parties, in particular other users, promoters or tax authorities, the manner in which the arrangement allows for obtaining a tax advantage.

The first of the general identification marks concerns the confidentiality clause and keeping in confidence from third parties (especially other users, promoters or tax authorities) the manner in which tax schemes allowed for obtaining a tax advantage.

Art. 86a § 1 (6b) – the promoter is entitled to receive remuneration, the amount of which depends on the amount of the tax benefit resulting from the arrangement.

The above general identification mark concerns the method of calculating the promoter's remuneration, the amount of which is correlated with the amount of tax benefit obtained through the use of a given arrangement.

Art. 86a § 1 (6c) – the promoter is entitled to receive remuneration dependent on obtaining a tax benefit resulting from the arrangement or has undertaken to return the remuneration or part of it if the tax benefit does not arise or is generated in an amount lower than expected.

Another general identification mark is the situation in which the payment of remuneration to the promoter depends on obtaining a tax benefit or the refund of remuneration already received by the promoter if the tax benefit is not obtained or is lower than expected.

It is worth emphasizing that it does not matter whether the contract between the promoter and the user is concluded orally or in writing and what the method of payment will be (e.g. debt relief) and what the amount of remuneration for the promoter will be, determined on the basis of the so-called success fee.

Art. 86a § 1 (6d) – activities performed as part of the arrangement are based on significantly standardised documentation or take a significantly standardised form, which do not require significant changes in order to implement the scheme for more than one user.

Another general identification mark assumes that the activities carried out as part of the arrangement use documentation that, in order to implement it, generally does not require much intervention or takes a significantly standardised form.

The implementation of such an arrangement should not require additional actions or modifications on the part of the user.

Art. 86a § 1 (6e) – deliberate actions are taken to acquire a loss-making company, discontinue the main activities of such a company and use the losses of such a company in order to reduce tax liabilities, including by transferring these losses to an entity in the territory of another country or accelerating the use of these losses.

The above general identification mark describes a situation related to the acquisition of a company that generates losses or the cessation of operations and the use of losses of such a company in order to reduce tax liabilities by, for example, accelerating the use of these losses.

As a rule, the indicated feature will apply when the activities undertaken are aimed at achieving the goal indicated in the above-mentioned provision.

Art. 86a § 1 (6f) – there is a change in the qualification of income (revenue) to another source of income (revenue) or a change in taxation rules, which results in actual lower taxation, exemption or exclusion from taxation.

The general identification mark may apply in a situation where a change in qualifications or taxation rules actually resulted in lower taxation, exemption or exclusion from taxation. However, it does not matter whether it is the result of purely domestic activities or activities to which double taxation avoidance agreements apply.

However, e.g. the choice to tax real estate transactions with VAT by waiving the voluntary VAT exemptionit will not meet the above feature.

Art. 86a § 1 (6g) – activities lead to an indirect circulation of funds through the involvement of intermediary entities that do not perform significant economic functions, or activities that cancel or compensate each other or lead to a state identical or similar to the state existing before these activities were performed or have other similar marks.

The general identification mark described above occurs when activities within the tax scheme require the involvement of at least one intermediary entity that does not perform significant economic functions (e.g. certain holding companies) or the activities undertaken as part of the arrangements cancel or compensate each other, or lead to similar condition before the activities were performed (or have other similar marks).

Art. 86a § 1 (6h) includes cross-border payments between related entities that are tax-deductible and, in the country of residence, registered office or management board of the recipient:
- no corporate income tax is levied or corporate income tax is levied at a zero rate or a rate of less than 5%,
- these payments are fully exempt or covered by preferential taxation rules.

The above identification mark applies to cross-border tax schemes. Its aim is to eliminate artificial tax benefits resulting from payments made between related entities to countries with a low level of taxation.

Please note that for this feature to be met, payments do not have to be made to countries practicing harmful tax competition.

Art. 86a § 1 (6i) – the beneficiary has undertaken that if the arrangement is implemented, they will cooperate with the promoter who made the arrangement available or will pay remuneration or compensation to the promoter.

The general identification mark concerns the situation in which the beneficiary has undertaken to continue cooperation with the promoter in the scope of the arrangement that they have developed and made available, or to pay the promoter remuneration or compensation if they have not been engaged to further implement the arrangement.

Art. 86a § 1 (6j) the promoter or user actually respects at least one of the obligations indicated in points 6b/6c.

The penultimate of the defined general identification marks will apply when there is no clear basis in the contract for the payment of a success fee, but due to the occurrence of a tax advantage (and its amount), the beneficiary pays such remuneration to the promoter in any form. This feature also applies when the promoter actually returns the remuneration received because the tax benefit did not arise or was created in an amount lower than originally expected.

Art. 86a § 1 (6k) based on the existing circumstances, it should be assumed that a reasonable promoter or user, to whom the obligations provided for in the provisions of this chapter would not apply, would like at least one of the obligations indicated in 6a-c to be actually respected.

The last general identification mark applies when the agreement between the promoter and the user does not specify a clear basis for payment or refund of remuneration (success fee) or maintaining special confidentiality in the relationship between the user and the promoter. However, the assumption that the behavior of both parties is rational allows us to assume that additional remuneration resulting from obtaining a tax benefit will be paid or refunded or confidentiality will be maintained as to the method of obtaining the tax benefit.

Summarising all the above explanations, it is worth noting that the general identification marks of tax schemes can be divided into two basic categories:

• regarding the relationship between the user and the promoter, defined in Art. 86a § 1 (6a-c) and (6i-k) of the Tax Ordinance
• other general identification marks as defined in Art. 86a § 1 (6d-h) of the Act.

It is worth noting, however, that this distinction is only of ordering nature.

How to verify that an arrangement meets the general identification mark?

Orientation in the field of reporting tax schemes and knowledge of the specific identification marks (general, but also specific and other specific) make it easier to diagnose whether given arrangements constitute tax schemes and are subject to the obligation to report to the Head of the National Tax Administration.

It should be remembered that even the most basic activities carried out in business transactions, e.g. concluding a loan agreement, may constitute a tax scheme. Therefore, it is worth treating the issue of tax schemes with due attention. In order to verify whether a given arrangement meets the general identification mark, it is necessary to carefully analyse the provisions of the Tax Ordinance. To help taxpayers understand these guidelines, the Ministry of Finance published tax clarifications on 31 January 2019, which should help understand when a given characteristic may be met.

However, taking into account the lack of interpretations and judgments regarding MDR and the severe consequences for taxpayers due to failure to fulfill the reporting obligation, it is worth consulting an experienced tax advisor.