The ‘cum-ex scandal’ being the nut in question here. After a consortium of journalists uncovered schemes generating multiple refunds of German dividend withholding tax, the European Parliament asked the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) to conduct an investigation into the relevant financial transactions. In response, both authorities have understandably condemned the practice and proposed corrective action. ESMA’s proposed changes to the Market Abuse Rules (MAR) have, however, been criticised and opportunities for a co-ordination with existing measures suggested. Indeed, I would read the EBA proposal to be pointing in the same direction: we need a fine-tuning of existing tools rather than an entirely new set to crack this particular nut.

Nature of the nut

In March 2020, a German court confirmed that the relevant transactions went beyond legal tax optimisation. Two former bankers were convicted for tax evasion and the facilitation of tax evasion in respect of their participation in ‘cum-ex’ schemes (German language press release).

So, what tools would be available to tackle a similar situation in 2020?

For these purposes we shall assume that X, working in London, has brokered a transaction which allows another person (P) to make a fraudulent claim for a refund of German dividend withholding tax. We shall further assume that P’s and X’s actions amount to crimes: namely, tax evasion in respect of P and the facilitation of tax evasion in respect of X.

Some of the tools in the box

Like the two former bankers convicted in March 2020, P and X could be subject to criminal sanctions in Germany. X’s employer (E) could also be subject to criminal sanctions in the UK. In 2017, the UK introduced an offence of failing to prevent the facilitation of tax evasion which is administered in the UK by HMRC, the UK’s tax authorities. Broadly, if E’s employee, agent or service provider facilitates another person’s tax evasion while acting as such, E would be liable to a conviction and a fine under this offence, unless E can show – and E will bear the burden of proving this - that it had in place reasonable prevention procedures (or it was reasonable not to have in place any such procedures) (see the UK government guidance for further information).

It also seems likely that the relevant transactions would be reportable to HMRC and/or the German tax authorities under the DAC6 mandatory disclosure rules due to come into force on 1 July 2020. (It has, however, been proposed that the reporting deadlines will be postponed in light of COVID-19.) Under DAC6, cross-border transactions concerning at least one EU Member State or the UK are reportable to HMRC or an EU tax authority, if they meet one of a number of hallmarks. One of these hallmarks is that the main benefit to be derived from a transaction with standardised documentation available to more than one taxpayer is a tax advantage. ‘Cum-ex’ schemes would seem to fall squarely within this hallmark. But, in itself, DAC6 reporting will not be a sign of wrongdoing. The application of the above-mentioned hallmark is not limited to illegal tax benefits and other hallmarks apply even if the relevant transaction does not have any tax benefit at all!

Assuming that, whether following a DAC6 report or otherwise, HMRC or the German tax authorities decided to investigate P’s, E’s or X’s affairs, they could collaborate in a number of ways, for instance:

• Having found grounds for supposing that the transaction may have resulted in a loss of German tax, HMRC may decide to provide information to the German tax authorities under the spontaneous exchange of information provisions under the relevant EU Directive or the OECD’s Convention on Mutual Administrative Assistance in Tax Matters.
• Article 27 of the Germany-UK double tax treaty (which follows the OECD’s model article) should allow the German tax authorities to request any information relevant to their investigation of P (and X) from HMRC. It may also be possible that HMRC could use this provision to request information in respect of its investigation of E for failing to prevent the facilitation of tax evasion. Subject to the supplying tax authority’s consent and provided such use or sharing is permitted under German and UK law, information received under Article 27 could be used for non-tax purposes, and HMRC and the German tax authorities could share such information with the national financial regulators.

ESMA and EBA proposals

In response to the European Parliament’s call for an investigation into the ‘cum-ex’ scandal, ESMA published a report setting out its preliminary findings and proposed to amend the MAR to empower national regulators to investigate and sanction “unfair behaviours carried out…that represent a threat to the integrity of the financial markets as a whole” and to cooperate and share information with tax authorities.

To the extent that respondents commented on this proposal, information-sharing with tax authorities seemed to be considered sensible. (The additional investigatory and sanctioning powers were, however, criticised as overbroad.) In particular, it was mentioned that tax authorities could be authorised to share DAC6 reports. This could be achieved through existing national provisions (for instance, in the UK, HMRC may share information with financial regulators for the purpose of assisting or enabling them to discharge their functions) or a uniform set of rules applicable across all EU Member States. Such rules could also address the extent to which it is permissible for tax authorities to share information received under a double tax treaty.

Such fine-tuning of the existing rules would seem to be a sensible approach. Indeed, I would read the EBA’s action plan as pointing in the same direction as a number of action items relate to the review and/or amendment of existing guidance to make appropriate reference to tax crimes, including tax crimes committed through the participation in dividend arbitrage schemes. For instance, the Guidelines on the Assessment of the Suitability of Members of the Management Body and Key Function Holders is to be amended to ensure that tax offences are considered in the assessment. It is planned that consultations on the new guidance will take place later this year or in early 2021 to be finalised during the course of 2021.