The sixth EU Directive on the field of administrative cooperation, most commonly referred to as ‘DAC6’, imposes mandatory disclosure requirements for certain arrangements with an EU cross-border element and has major impacts for EU service providers and EU taxpayers, but will also indirectly affect non-EU providers with EU resident clients. The deadlines for DAC6 reporting are being deferred in many – but not all – jurisdictions due to the COVID-19 pandemic. The transposition of the Directive into national legislation is still pending in a few Member States, and further guidance and clarifications on the interpretation and impact of the rules have partly yet to come. These matters complicates DAC6 compliance for all parties involved. We highlight some key elements and the challenges that the industry is currently facing.
On 25 June 2018, the EU Council Directive 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (‘DAC6’ or the ‘Directive’) entered into force. DAC6 is based on the OECDs model mandatory disclosure rules (‘MDR’), but takes it a step further and is much wider in scope – covering not only CRS avoidance and the use of opaque structures to make the identification of the ultimate beneficial owner more difficult, but also potentially aggressive tax planning schemes.
Reportable cross-border arrangements which were put in place between 25 June 2018 and 30 June 2020 (retrospective period) are in accordance with the directive to be reported by 31 August 2020, and reportable cross-border arrangements implemented as of 1 July 2020 are to be reported within 30 days.
In the light of the COVID-19 situation, the EU Council has adopted an amending directive allowing the EU Member States to defer reporting deadlines with up to six months and under certain circumstances additional three months. It is important to bear in mind that the EU Member States may decide for themselves whether they wish to make use of the possibility to defer the deadlines, and for how long within the given time frame. To date, Finland and Germany have announced that they will not defer the deadlines. Austria is pushing back its first deadline with a three-month deferral. A number Member States (including e.g. Belgium, Denmark, Ireland, Luxembourg, Netherlands, Sweden and the UK) have announced an intended or confirmed six-month deferral. Assuming the full six-month deferral is made use of, reportable cross-border arrangements implemented during the retrospective period are to be reported no later than 28 February 2021. The 30-day reporting deadline for arrangements implemented on or after 1 July 2020 will begin by 1 January 2021 – meaning that reports are due by 30 January 2021.
The Member States were required to transpose DAC6 into national legislation by the end of 2019. Many jurisdictions did not meet this deadline. However, to date, most of the Member States have published their legislation and some of them also additional implementing guidelines. A few jurisdictions such as Cyprus, Italy and Spain are yet to follow.
Member States do have some leeway in how they transpose the directive into national law. Some parts must be transposed as they are, others such as the parts regarding penalties or the scope of reportable transactions can be defined by the Member States, and may go beyond the scope of the directive to include e.g. purely domestic arrangements, otherwise excluded taxes such as VAT etc.
Who is affected by DAC6?
An arrangement is cross-border if it involves at least one EU Member State or an EU Member State and a third country. Such arrangements may concern all taxpayers, i.e. both natural and legal persons (i.e. companies) and legal arrangements such as trusts.
Affected are on the one hand EU intermediaries, for example tax advisors, lawyers or accountants or any other person who designs, promotes or provides assistance in regard to certain cross-border arrangements. On the other hand, the reporting obligation may under some circumstances instead shift to the relevant EU taxpayer, for example if the only involved intermediary is non-EU, if it is an in-house arrangement or if an EU intermediary has the right to a waiver due to legal privilege.
If several EU intermediaries are involved in the same arrangements, a reporting obligation lies with each one of the intermediaries. Only to the extent an intermediate has proof that the relevant information has already been reported by another intermediary will the first-mentioned intermediary be exempt from reporting.
The fact that the reporting obligation will shift to the relevant taxpayer e.g. if the only relevant intermediary is non-EU resident further means that intermediaries such as tax advisors, lawyers and fiduciaries outside of EU cannot in the best interest of its EU clients ignore the DAC6 rules.
What kind of arrangements are in scope?
A cross-border arrangement is in scope for reporting if at least one so called ‘hallmark’ is met. The hallmarks referred to in Annex IV of DAC6 contain characteristics or features of an arrangement that present an indication of e.g. aggressive tax planning or CRS avoidance. Some of the hallmarks include a main benefit test, which means that in order to be considered reportable, one of the main objectives of the arrangement must have been to obtain a tax advantage.
Many are currently struggling with the analysis of arrangements implemented during the retrospective period as well as with the implementation of efficient and secure mechanisms to detect and report new arrangements in a correct and timely manner under the constantly ongoing 30 day deadline – to an extent still without clear guidance on how to interpret the rules or even without final legislation. Further to this, the DAC6 reporting regime will in many cases mean a large coordination work since a number of intermediaries may be involved in the same arrangement and all have a reporting duty unless they can prove that the arrangement has already been reported.
Adding to this the partly uncertain and varying deadlines and the local variations in the DAC6 legislation between the EU Member States, it is no surprise that DAC6 presents a major challenge to the whole industry.
While the deadline extensions, where provided, gives both authorities and the industry a welcome breathing space, potentially affected intermediaries and taxpayers should not remain passive, but start with the analysis work and implementation of DAC6 compliance measures in order to meet reporting obligations if they have not already.
Should you have any queries about DAC6 and how it affects you, please do not hesitate to contact us.