Reporting of tax schemes MDR Mandatory Disclosure Rules
MANDATORY DISCLOSURE RULES (MDR; reportable tax arrangements; French: déclaration obligatoire des dispositifs transfrontières) constitute a comprehensive system requiring the mandatory disclosure of potentially aggressive tax planning structures. This regime imposes upon tax advisors (termed “intermediaries”) and, in specified circumstances, upon taxpayers themselves, an affirmative obligation to report to tax authorities both cross-border and domestic schemes exhibiting certain hallmarks indicative of tax avoidance. The institution represents a critical component of the global tax transparency policy framework and the broader initiative to combat base erosion, furnishing fiscal authorities with early access to intelligence regarding aggressive tax planning before such strategies achieve widespread implementation.
Legal Nature and Operative Mechanism
MDR operates as a legal mechanism mandating disclosure of specified transactions or tax structures predicated upon objective criteria denominated as “hallmarks” – distinctive characteristics that identify potentially aggressive tax planning. The essence of MDR lies in a fundamental redistribution of the informational burden: whereas tax authorities traditionally detected aggressive optimization structures through ex post audits, MDR obligates intermediaries and taxpayers to proactively disclose potentially problematic schemes either before implementation or shortly thereafter.
The MDR framework functions as an “early warning system,” enabling tax administrations to respond expeditiously through legislative amendments that eliminate legal lacunae, intensified scrutiny of taxpayers utilizing reported structures, or negotiation of binding advance rulings. Unlike other tax transparency instruments – such as country-by-country reporting or the automatic exchange of financial account information (AEOI) – MDR focuses specifically upon transactions and structures bearing the hallmarks of aggressive tax avoidance, rather than upon routine financial reporting.
The reporting obligation rests primarily upon intermediaries – professional advisors who design, organize, implement, make available for implementation, or manage tax schemes. This category encompasses tax advisors, legal advisors, auditors, accountants, financial institutions, investment banks, and promoters of tax structures. When an intermediary enjoys legal professional privilege, lacks sufficient territorial nexus with the relevant jurisdiction, or when the scheme constitutes an in-house arrangement developed without external advisors, the reporting obligation devolves upon the taxpayer who implements the scheme (the “relevant taxpayer”).
Hallmarks segregate into several categories: generic hallmarks, specific hallmarks, and those addressing particular domains such as transfer pricing or the exchange of tax information. Certain hallmarks additionally require satisfaction of the “main benefit test” (MBT), which examines whether obtaining a tax advantage constitutes the primary purpose or one of the principal purposes of the structure. This test serves to circumscribe the reporting obligation to structures genuinely motivated by tax considerations, thereby excluding routine business transactions that fortuitously satisfy the formal hallmark criteria.
Historical Genesis
The roots of contemporary MDR systems extend to the 1980s, when pioneering regulations emerged in common law jurisdictions responding to increasingly sophisticated tax avoidance structures. The United States led this movement: in 1984, Congress enacted Section 6111 of the Internal Revenue Code, requiring registration of “tax shelters” – structures exhibiting significant tax avoidance objectives and characterized by specified ratios of fees to investment. Canada followed suit in 1988, directly modeling its provisions upon the American framework.
American provisions evolved substantially during the 2000s in response to corporate scandals involving Enron, WorldCom, and other enterprises exploiting complex corporate structures. In 2004, through the American Jobs Creation Act, the United States significantly expanded disclosure obligations, introducing the concept of “reportable transactions” and imposing requirements upon both material advisors and taxpayers. Sections 6011, 6111, and 6112 of the Internal Revenue Code established a comprehensive system requiring advisors not merely to disclose transactions but also to maintain detailed client lists accessible to the Internal Revenue Service.
A watershed moment in MDR development occurred with the United Kingdom’s 2004 introduction of the Disclosure of Tax Avoidance Schemes (DOTAS) system, which required scheme promoters to disclose arrangements to HM Revenue & Customs and obtain unique Scheme Reference Numbers (SRNs). Taxpayers implementing disclosed schemes were obligated to cite these numbers in their tax returns, enabling tax authorities to identify rapidly users of particular structures and conduct targeted audits. DOTAS demonstrated considerable efficacy in identifying mass-marketed tax avoidance schemes and became a model for numerous other jurisdictions. The number of newly disclosed schemes declined from 116 in fiscal year 2009-10 to 28 in 2013-14, evidencing the system’s deterrent effect upon promoters of aggressive structures.
Portugal and Ireland implemented analogous regulations during the first decade of the twenty-first century (Portugal in 2008 through Decree-Law 29/2008; Ireland in 2010 through Finance Act 2010), creating what might be termed the “first generation” of MDR systems, characterized by concentration upon domestic tax structures and a narrower scope of reporting obligations compared to subsequent international systems coordinated by the OECD and European Union.
A pivotal moment in MDR globalization arrived with the OECD’s October 2015 publication of the final report under the Base Erosion and Profit Shifting (BEPS) project, specifically Action 12: Mandatory Disclosure Rules. This document formed part of a broader package of fifteen actions designed to counter base erosion and profit shifting by multinational corporations. The BEPS Action 12 report contained detailed recommendations for designing mandatory disclosure systems, emphasizing cross-border optimization structures that exploit mismatches between different states’ tax systems.
The report advocated a modular approach to MDR, permitting jurisdictions to tailor systems to local needs, policy priorities, and administrative resources while maintaining international coherence facilitating effective information exchange. The framework introduced hallmarks as objective features identifying potentially aggressive structures and the main benefit test to limit reporting obligations to structures genuinely motivated by tax considerations. The OECD additionally identified categories of intermediaries subject to reporting obligations and mechanisms for transferring this obligation to taxpayers when intermediaries enjoy professional privilege or fall outside a state’s jurisdiction.
Responding to OECD recommendations, the European Union adopted Council Directive (EU) 2018/822 on May 25, 2018 (commonly known as DAC6 – the sixth directive on administrative cooperation in taxation). DAC6 imposed upon Member States an obligation to establish mandatory disclosure systems for cross-border tax arrangements and to automatically exchange acquired information among EU countries through a centralized database. The Directive defined “cross-border” expansively – encompassing not only transactions between different Member States but also transactions between the EU and third countries, as well as situations where a taxpayer resides in one state but conducts business in another through a permanent establishment.
Member States were required to implement DAC6 by December 31, 2019, with a planned effective date of July 1, 2020. The COVID-19 pandemic, however, precipitated a six-month postponement of reporting deadlines in numerous jurisdictions. The Directive covered schemes implemented from June 25, 2018, and mandated retrospective reporting of structures from the transitional period between June 2018 and July 2020, creating substantial operational challenges for enterprises and tax advisors.
Poland constituted one of the few Member States implementing MDR provisions significantly earlier than the Directive required – January 1, 2019 – and extending considerably beyond minimum European standards by encompassing not only cross-border schemes but also domestic tax structures and indirect taxes (VAT for domestic schemes). This substantial scope expansion, coupled with exceedingly broad hallmark definitions and insufficient filtering mechanisms, precipitated an avalanche of disclosures.
Concurrent with DAC6’s development, in March 2018 the OECD published Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures – model provisions concentrating upon two specific areas: structures designed to circumvent the Common Reporting Standard (automatic exchange of financial account information) and opaque offshore structures concealing beneficial owners. The OECD MDR Model responded to mounting concerns that CRS implementation might spawn structures engineered to evade financial account reporting obligations, for instance through insurance policies, trusts, or special-purpose entities excluded from financial institution definitions.
Procedural Systems Worldwide. MDR systems vary considerably among jurisdictions, reflecting divergent legal traditions, policy priorities, and administrative capacities.
The EU system under DAC6 encompasses all 27 Member States and (pre-Brexit) the United Kingdom. The Directive identifies five principal hallmark categories, whose selection and detailed implementation may differ among Member States within the Directive’s parameters.
Category A (generic hallmarks) encompasses structures characterized by general features such as confidentiality clauses prohibiting disclosure to other tax advisors, contingent fees dependent upon achieved tax benefits, or utilization of standardized documentation available to multiple taxpayers. All Category A hallmarks remain subject to the main benefit test, meaning the reporting obligation arises only when obtaining a tax advantage constitutes the primary purpose or one of the principal purposes of the structure.
Category B (specific hallmarks subject to main benefit test) encompasses more specific structures, including acquisition of loss-making companies solely or principally to utilize tax losses to offset profits, conversion of income into capital, gifts, or other categories of revenue subject to lower taxation, or circular transactions resulting in round-tripping of funds. These hallmarks likewise require satisfaction of the main benefit test.
Category C (specific hallmarks related to cross-border transactions) concentrates upon cross-border payments between related parties where the recipient is not subject to taxation, benefits from an exemption, or enjoys a preferential tax rate substantially lower than the rate applicable in the payer’s state; payments deductible in more than one state (double deduction); depreciation of the same asset in more than one state (double depreciation); or payments exempt in the recipient’s state despite deductibility in the payer’s state without concurrent taxation of the recipient. Certain Category C hallmarks do not require the main benefit test given their specificity and high probability of aggressive character.
Category D (specific hallmarks concerning automatic exchange of information and beneficial ownership) encompasses structures designed to circumvent the Common Reporting Standard or conceal beneficial owners through chains of legal entities, legal persons, or legal arrangements lacking economic substance or genuine business activity, located in jurisdictions that are tax-opaque or do not exchange information according to international standards. This category addresses concerns regarding offshore structure utilization to conceal assets and evade financial transparency.
Category E (specific hallmarks concerning transfer pricing) concentrates upon transfer pricing and encompasses cross-border transfers of hard-to-value intangibles, transfers of functions, risks, or assets within a corporate group where the projected annual earnings before interest and tax (EBIT) of the transferring taxpayer within three years following transfer is less than 50% of projected EBIT absent the transfer, and unilateral safe harbors applied in transfer pricing. Category E hallmarks do not require the main benefit test.
According to data from the first eighteen months of DAC6 implementation, the most frequently reported structures involved hallmarks B2 (income conversion into capital or other preferentially taxed categories) and Category E hallmarks concerning transfer pricing, reflecting the prevalence of corporate restructurings and intra-group transactions in multinational enterprise operations.
The British DOTAS system has functioned continuously since 2004, becoming one of the longest-operating and most mature disclosure systems. It concentrates upon identifying mass-marketed schemes and bespoke schemes characterized by specified features. Following departure from the European Union, the United Kingdom replaced limited DAC6 implementation with adoption of the OECD MDR Model effective March 28, 2023. The new provisions encompass exclusively two narrow categories: structures designed to circumvent CRS and opaque offshore structures (corresponding to DAC6 hallmarks D1 and D2). This substantial scope narrowing reflects British conviction that DOTAS already effectively addresses domestic and standard cross-border tax avoidance schemes, while additional provisions should concentrate upon specific gaps related to financial transparency.
The American system, though not deriving directly from OECD initiatives, remains among the world’s most comprehensive and complex. Sections 6011, 6111, and 6112 of the Internal Revenue Code require material advisors to disclose reportable transactions and maintain detailed client lists accessible to the IRS. The American system distinguishes several categories of reportable transactions: listed transactions (specific structures identified by the IRS as abusive), confidential transactions (transactions subject to confidentiality clauses), transactions with contractual protection (where advisors offer fee refund guarantees if tax benefits are challenged), loss transactions (generating specified amounts of tax losses), and transactions of interest (transactions attracting IRS attention due to potential tax avoidance or evasion opportunities). The American system features particularly severe sanctions for non-compliance and unlimited assessment periods for improperly disclosed transactions.
Canada undertook fundamental MDR system reform in 2023, implementing expanded BEPS Action 12 recommendations. New provisions, effective June 22, 2023, encompass expanded categories of reportable transactions, a new category of notifiable transactions (specifically designated by the Minister of Finance as requiring disclosure), and an obligation for large corporations with assets exceeding CAD 50 million to report reportable uncertain tax treatments. The Canadian system imposes disclosure obligations within 90 days of specified triggering events and contemplates severe financial sanctions. Notably, unreported transactions remain subject to unlimited assessment periods, meaning the Canada Revenue Agency may audit them without temporal limitation.
The Polish MDR system, implemented January 1, 2019, pursuant to amendments to income tax legislation, ranks among the world’s broadest and most rigorous. Unlike DAC6, Polish implementation encompasses not only cross-border schemes as defined by the Directive but also domestic tax structures involving exclusively Polish taxpayers and operations within Poland. The system additionally covered indirect taxes – VAT for domestic schemes – representing a solution unique within Europe.
Poland established 24 hallmarks divided into three categories: generic, specific, and other specific hallmarks, of which only 11 require satisfaction of the main benefit test. Generic hallmarks proved particularly controversial, such as confidentiality clauses or payments to preferential tax jurisdictions, which in practice encompassed an exceedingly broad spectrum of routine business transactions lacking aggressive tax planning characteristics. The system contemplated draconian sanctions – financial penalties up to PLN 10 million for promoter entities and criminal fines up to 720 daily rates for natural persons.
Given excessive bureaucratization and an avalanche of disclosures – between June 30, 2020, and the end of 2024, 17,577 MDR-1 reports were filed, of which only 26% (4,591) concerned cross-border schemes while the remaining 73% addressed domestic schemes – in February 2025 the Ministry of Finance announced comprehensive reform. The reform responds both to principles from the Constitutional Tribunal’s July 23, 2024, judgment and to requirements of Directive DAC8 (Directive 2023/2867) of October 17, 2023, which Poland must implement by the end of 2025.
Planned changes encompass: (1) elimination of domestic scheme reporting obligations (potentially reducing disclosures by approximately 70% according to the Minister of Finance); (2) exempting tax advisors, advocates, legal counsels, and patent attorneys from reporting schemes protected by professional privilege, subject to an obligation to notify clients of their reporting duties; (3) elimination of internal MDR procedure requirements for taxpayers; (4) significant reduction of maximum penalties (from 720 to 240 daily rates, substantially decreasing maximum potential fines). The reform aims to align Poland’s system with practices prevailing in other EU Member States, harmonize with EU law requirements, and limit excessive administrative burdens upon taxpayers and advisors.
In Latin America, Mexico became the region’s first country to introduce MDR in December 2019, effective January 1, 2020. The Mexican system defines 14 hallmarks triggering reporting obligations and uniquely incorporates a de minimis threshold – schemes must generate tax benefits exceeding a specified value to become reportable. Tax advisors (asesores fiscales) must report structures within 30 days of providing advice, irrespective of whether the taxpayer actually implemented the transaction, representing a more restrictive solution than most other jurisdictions employ. Argentina implemented a similar system on October 21, 2020, requiring disclosure within merely 10 days of structure implementation, constituting one of the world’s shortest reporting periods.
The Republic of South Africa adopted the OECD MDR Model effective March 1, 2023, concentrating exclusively upon CRS avoidance structures and opaque offshore structures. The system requires intermediaries with sufficient nexus to South Africa to report relevant information to the South African Revenue Service, with “sufficient nexus” defined broadly to encompass tax residence, permanent place of business, membership in South African professional organizations, or even provision of advisory services to taxpayers who are South African residents.
Implementation Challenges and Compliance. MDR system implementation created substantial operational and legal challenges for multinational enterprises and tax advisors. Principal problem areas encompass identification of reportable structures within complex business operations, management of concurrent obligations across multiple jurisdictions with divergent hallmark definitions and reporting deadlines, and protection of professional privilege and client information confidentiality.
The question of legal professional privilege remains particularly controversial. DAC6 provides that intermediaries protected by professional privilege are exempted from reporting obligations, which then devolve upon other intermediaries or the taxpayer. However, implementation of this provision varies considerably among Member States, and the Court of Justice of the European Union, in its judgment of July 29, 2024, in joined cases C-623/22 and C-624/22 (Belgian Association of Tax Lawyers and Others), held that professional privilege protection cannot entirely eliminate the obligation to transmit information necessary to identify transactions to other intermediaries or taxpayers who bear reporting obligations. These judgments necessitated revision of domestic provisions in numerous Member States, including Poland.
Multinational enterprises must manage MDR obligations through implementation of comprehensive compliance procedures encompassing review of all significant transactions for hallmarks, training for financial and legal personnel, deployment of technological systems supporting identification and tracking of potentially reportable structures, and coordination with external advisors. Compliance costs are substantial – estimates for large multinational corporations range from hundreds of thousands to millions of dollars annually, encompassing both internal costs (personnel, systems) and external costs (advisors, software).
Significance and Prospects. MDR constitutes a fundamental element of the global tax transparency architecture, complementing other mechanisms such as automatic exchange of information (AEOI), country-by-country reporting (CbCR), public tax reporting (public CbCR), and beneficial ownership registries. MDR enables tax authorities to respond proactively to aggressive optimization structures, shortening the interval between implementation and introduction of corrective legislation eliminating legal lacunae – an effect termed “time to tax” (time between implementation and legislative response).
Experience from initial implementation years indicates significant challenges requiring further reforms. Excessive breadth in definitions of reportable schemes leads to inundation of tax authorities with information of low analytical value, as Poland’s dramatic example demonstrates – nearly 88,000 disclosures over five years, the majority posing no genuine threat to the tax system. Conversely, systems excessively narrow or precise may fail to capture innovative structures exploiting new financial instruments or digital economy business models.
A key trend involves convergence of international MDR standards toward greater harmonization of hallmark definitions, reporting deadlines, and information exchange mechanisms among jurisdictions, though significant differences persist, reflecting divergent policy priorities and states’ administrative capacities. Development of technological compliance platforms and automation of hallmark identification processes utilizing artificial intelligence and machine learning become essential for effective MDR obligation management within multinational corporate groups conducting thousands of annual transactions.
The future evolution of MDR systems will likely trend toward greater precision in reportable scheme definitions, more efficient information exchange among jurisdictions through centralized international platforms, and integration with other tax transparency tools, such as proposed global Pillar Two rules concerning minimum taxation of multinational corporations or expanded ESG (Environmental, Social, and Governance) reporting requirements. Simultaneously, discourse intensifies regarding the necessity of balancing states’ fiscal objectives against compliance costs borne by enterprises, protection of advisors’ professional privilege, and risks of excessive bureaucratization impeding legitimate business transactions. Legal disputes adjudicated by the Court of Justice of the European Union and ongoing OECD public consultations indicate that MDR systems will continue evolving, endeavoring to achieve appropriate equilibrium between tax transparency and protection of taxpayer and advisor rights.
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
