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DAC 6
Under the EU Directive 2018/822 (DAC6), adopted in May 2018, EU intermediaries such as banks, law firms, corporate service providers, accounting firms, and taxpayers themselves are obligated to report arrangements to the tax authorities in the country in which they are resident. The latter will then automatically share the information with the Tax Authorities of all other member states on a quarterly basis. Under the Directive the Member States have the option to exempt intermediaries from the obligation to report where the reporting obligation would breach legal professional privilege (LPP). If there are no intermediaries who can report, the obligation will shift to the taxpayers.
The main objectives of DAC6 is to promote transparency and minimise international tax evasion by providing Tax Authorities with information to spot new risks of tax avoidance at an early stage. The DAC (EU Directive on Administrative Cooperation) was initiated with Directive 2011/16 which established the legal basis for administrative cooperation in the field of direct taxation in Europe. The DAC was then followed by:
- DAC1 Directive 2011/16/EU Art. 8 Automatic Exchange of Information on Five Non-Financial Categories; Income from Employment, Directors Fee, Pensions, Life Insurance, Immovable Property
- DAC2 Directive 2014/107/EU Common Reporting Standards; Automatic Exchangnaie of Information on Financial Account Information
- DAC3 Directive 2015/2376/EU Automatic Exchange of Tax Rulings; Advance Cross Border Rulings, Advance Pricing Arrangements
- DAC4 Directive 2016/881/EU Automatic Exchange of Country by Country Reports; Revenues, Profits, Taxes Paid and Received, Accumulated Earnings, Number of Employees, Assets
- DAC5 Directive 2016/2258/EU ensures tax authorities have access to beneficial ownership information collected pursuant to the anti-money laundering legislation
- DAC6 Directive 2018/822/EU Mandatory Disclosure Regime on automatic exchange of reportable cross border arrangements.
An arrangement concerning either more than one Member State or a Member State and a third country where at least one of the following conditions is met:
- not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
- one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
- one or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment;
- one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
- such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
An intermediary is anyone who aids the designing, marketing, organising, making available for implementation, or managing the implementation of a reportable cross-border arrangement.
To be an intermediary, a person shall meet at least one of the following additional conditions:
- be resident for tax purposes in a Member State;
- have a permanent establishment in a Member State through which the services with respect to the arrangement are provided;
- be incorporated in, or governed by the laws of, a Member State;
- be registered with a professional association related to legal, taxation or consultancy services in a Member State.
An arrangement will be reportable if it meets certain criteria called Hallmarks. Hallmarks are categorised from A to E as follows;
Category A:Generic Hallmarks linked to the main benefit test which means that one of the main objectives of the cross-border arrangement is to obtain a tax advantage. Generic hallmarks are arrangements that give rise to performance fees or involve mass-marketed schemes.
Category B:Specific Hallmarks linked to the main benefit test which includes certain tax planning features like buying a loss-making company to exploit its losses in order to reduce tax liability.
Category C:Specific Hallmarks related to cross-border transactions such as deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax.
Category D:Specific Hallmarks concerning the automatic exchange of information and beneficial ownership whereby an arrangement does not abide by the rules of the already existing agreement on automatic exchange of financial account information.
Category E:Specific Hallmarks concerning transfer pricing such as the arrangements involving the use of unilateral transfer pricing safe harbour rules.
Failure to comply and providing false or incomplete information to the authorities with respect to cross-border arrangements will lead to substantial administrative fines amounting to up to EURO 20,000 per violation.
European Member States have been given an extension to comply with certain rules on cross-border information reporting, as a response to the coronavirus (Covid-19) pandemic.
The Council of the EU announced that it has adopted an amendment to the Directive on Administrative Cooperation (DAC), allowing EU Member States an option to defer the time limits for filing and exchange of information, with respect to mandatory disclosure requirements (MDRs) for intermediaries and relevant taxpayers under the Directive on Administrative Cooperation (DAC6).
The optional deferral is in response to the severe disruption to the activities of many financial institutions, tax advisers and authorities caused by the Covid-19 lockdown measures.
The amendments, as adopted, give EU Member States the option to delay the deadlines for filing information on reportable cross-border arrangements by up to six months, as follows:
- The beginning of the 30-day period for reporting cross-border arrangements, will likely be extended from 1 July 2020 to 1 January 2021.
- The deadline for the reporting of historical arrangements – implemented between 25 June 2018 and 30 June 2020 – will likely be extended from 31 August 2020 to 28 February 2021.
- For the first periodic report on marketable RCBAs by the intermediary will likely take place on 30th April 2021.
- The first exchange of information on RCBAs between EU Tax Authorities, will likely take place on 30th April 2021.
The Directive, commonly known as "DAC6", provides for the mandatory automatic exchange of information in the field of taxation with respect to reportable cross-border arrangements.
Under the Directive, intermediaries, and in some cases taxpayers, have the primary obligation to report arrangements to the tax authorities in the country in which they are resident. The tax authorities will then automatically share the information with the Tax Authorities of all other member states on a quarterly basis.
Reportable Arrangements:
Under the Directive, an arrangement is reportable if:
A cross-border arrangement is defined as an arrangement concerning more than one Member State or a Member State and a third country.
What is Hallmark:
A hallmark is a characteristic or feature of a cross-border arrangement entailing its mandatory reporting if met.
Reportable Information:
Under the Directive, intermediaries, and in some cases taxpayers, have the primary obligation to report arrangements to the tax authorities in the country in which they are resident. The tax authorities will then automatically share the information with the Tax Authorities of all other member states on a quarterly basis.
Reportable Arrangements:
Under the Directive, an arrangement is reportable if:
- The arrangement meets the definition of a cross-border arrangement; and
- The arrangement meets at least one of the hallmarks of the Directive.
A cross-border arrangement is defined as an arrangement concerning more than one Member State or a Member State and a third country.
What is Hallmark:
A hallmark is a characteristic or feature of a cross-border arrangement entailing its mandatory reporting if met.
Reportable Information:
- Identification of all taxpayers and intermediaries involved, including
- Details of the relevant applicable hallmark(s).
- A summary of the arrangement, including (in abstract terms) a summary of relevant business activities.
- The date on which the first step in implementation was or will be made.
- Details of the relevant national law.
- The value of the cross-border reportable arrangement.
- Identification of relevant taxpayers or any other person in any Member State likely to be affected by the arrangement.
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