This obligation arises from EU Directive (EU) 2018/822 of 25 May 2018, which amends Directive 2011/16/EU regarding mandatory automatic exchange of information relating to reportable cross-border tax arrangements, the so-called Mandatory Disclosure Rules (MDR) Directive.

However, the Polish legislator has extended the boundaries of the MDR Directive, introducing provisions on reporting arrangements between Polish businesses in the area of VAT.

MDR regulations are intended to provide the tax administration with information on tax planning models used by taxpayers. This information will be used to tighten the tax system. Although the term ‘tax scheme’ has quite a negative connotation associated with tax avoidance, the definition of a ‘tax scheme’ is very broad, and the reporting obligation covers taxpayers' activities fully compliant with the tax law as well as those that are not.

From the outset, the new obligation to report tax schemes has raised doubts. Rules can be interpreted differently. And there are technical issues to do with submitting information about the schemes. In this respect, on 31 January 2019, the Ministry of Finance published Tax Explanatory Notes - Information on Tax Schemes (MDR). The publication was intended to help reporting entities in interpreting the rules, Unfortunately, the notes did not erase the doubts.

Taking into account the specific nature of the financial sector and the essential role of banks in reporting tax schemes, the Ministry of Finance decided that it was necessary to issue additional clarifications for banking sector. The draft clarifications are now available (in a draft dated 1 October 2019), but have not yet been finally approved and adopted. However, until such time as they are finally approved and published, the draft may only serve as set of good-practice guidelines for the banking sector.   

What is a tax scheme, and who is obliged to report?

The concept of a tax scheme is very broad, covering many typical transactions that are not entered into for the purpose of tax savings or tax avoidance. Therefore, the reporting obligation in the vast majority of cases concerns situations in which no tax advantage will occur at all. The occurrence of the ‘main advantage criterion’ is indispensable for the schemes that have the so-called generic hallmarks.

Three categories of entities are obliged to provide information on tax schemes. They are defined in the rules as promoters, beneficiaries and supporters. In customer relations, financial institutions usually act as supporters. Although standard banking products and services are not tax schemes in general, the services provided by financial institutions may support their clients in implementing tax schemes. That is why in this article I would like to focus on the supporters’ role of financial institutions and their employees.

Generally required due diligence – what is it?

Under MDR rules, supporters` obligations will be imposed on a financial institution only if it undertakes (through its employees) to provide assistance, aid or advice on designing, marketing, organising and making available for implementation, or supervising the implementation, of an arrangement. At the same time, the financial institution must ensure the due diligence generally required in the activities performed, taking into account the professional character of the activity, the area of its specialisation and the subject of the performed activities. This due diligence should be examined in relation to a specific person, such as an employee of a financial institution who has undertaken to provide assistance, or advice, and not to the institution as an organisation.      

To exercise the due diligence, an employee does not need to actively search the databases or any client documentation of a financial institution for hallmarks, such as discovering whether or not the operation has another particular hallmark, or whether the client is engaged in a larger transaction and the banking services in which he participates are part of a larger whole that may constitute a tax scheme.

Neither is it required for a financial institution to create for this purpose tools that would monitor the crossing of thresholds resulting from particular hallmarks (e.g. whether the income of a foreign contractor for whom a bank guarantee is granted exceeds PLN 25 million in a tax year). In this respect, it will be sufficient to take advantage of existing tools used, for example, in the processes of counteracting money laundering and terrorism financing.

In conclusion, these entities are not obliged to actively seek information about the arrangement and its tax consequences. If a particular event triggers an obligation to report a tax scheme, it will only concern the information held by the supporter.

How and when to report?

If the supporter has any doubts that the arrangement may constitute a tax scheme and has not been informed by the client of the scheme reference number (numer schematu podatkowego or NSP) or its lack, they are obliged to:

• request the client in writing to provide a written statement that the arrangement does not constitute a tax scheme (within five days from the moment of the doubt arising),

and

• submit information on the tax scheme on the MDR-2 form (also within five days from the moment of the doubt arising).

If the supporter immediately notices that the arrangement constitutes a tax scheme, they may not request the client to confirm that the arrangement under which the activity is performed does not constitute a tax scheme.

Moreover, if the supporter was not informed about the NSP (scheme reference number) or the lack of an NSP by the client, they are obliged to submit information about a tax scheme, if they saw or should have seen that the arrangement they are supporting constitutes a tax scheme. In this case, the supporter is obliged to submit information about the tax scheme on the MDR-1 form within 30 days.

However, if the supporter is not released from the legal obligation to maintain professional secrecy (which is a statutory obligation), they are required to submit information about the tax scheme on the MDR-2 form within 30 days and immediately inform the client in writing that in their opinion the arrangement constitutes a tax scheme.

With their limited role and lack of knowledge about the whole transaction to which the conducted activities relate, employees of financial institutions must not only be able to identify a tax scheme, but also, within in a very short time, provide information about the tax scheme they have recognised. Taking into account the discretionary character of due diligence and very strict sanctions for non-compliance with MDR reporting obligations, the supporter`s situation looks rather difficult.