How DAC 6 will affect you: 5 points of attention in 2019
On 25 June 2018, the Sixth Directive Amending the Directive on Administrative Cooperation in Tax Matters (EU DAC 6) came into force, obligating intermediaries and/or taxpayers to disclose ‘potentially aggressive tax planning arrangements’ to their tax authorities, intending to minimise the use and promotion of such schemes.
By the end of 2019, each EU member state will have implemented sanctions to penalise non-compliance. Designed to be ‘effective, proportionate and dissuasive’, failure to observe these new regulations could prove extremely costly.
1. What is a ‘potentially aggressive tax planning arrangement’?
An ‘arrangement’ in its broadest sense might cover any transaction, scheme, action, operation, agreement, grant, understanding, promise, undertaking or event, or combination of the above.
An arrangement must be reported if:
- It is ‘cross-border’, concerning multiple EU Member States, or a single Member State alongside a third country;
- It fulfills at least one of the ‘hallmarks’, as defined in the Directive. In this case, it will be named a “reportable cross-border arrangement”.
2. What are the ‘hallmarks’ of an aggressive tax planning arrangement?
EU DAC 6 defines five types of hallmark that may signify a breach of conduct:
- Generic hallmarks linked to the main benefit test (see below): e.g. when a confidentiality clause is in force between participants to an arrangement, or when the fees paid to an intermediary depend on the tax advantage derived from the arrangement;
- Specific hallmarks linked to the main benefit test (see below): e.g. acquisition of loss-making company in specific cases, conversion of income types which benefit from lower taxation or exemption;
- Specific hallmarks related to crossborder transactions: e.g. depreciation of same asset in multiple jurisdictions, double relief from taxation with respect to the same asset in two different jurisdictions;
- Specific hallmarks related to the automatic exchange of information and beneficial ownership: e.g. transfer of account to a non Automatic Exchange of Information (AEOI) jurisdiction;
- Specific hallmarks related to transfer pricing: e.g. transfer of hard-to-value intangibles.
As indicated, some of the hallmarks should only be considered when the ‘main benefit test’ threshold is met. This occurs if it can be established that the main benefit, or one of the main benefits, which a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
3. Who has to report?
Primary responsibility for Reportable Cross-Border Arrangements (RCBAs) lies with intermediaries who have designed, marketed, organized or made available for implementation such arrangements (promoters), or who have aided, assisted or advised with the implementation of such arrangements (service providers)– assuming they understood what it was they were involved in. They are also required to have an EU nexus, i.e. be tax resident, incorporated, or have permanent establishment with a professional association in an EU Member State.
However, if an intermediary has evidence that a RCBA has already been reported by another intermediary, or that intermediary has a legal professional privilege under the national law of an EU Member State, it is exempt from reporting duties. In such cases, or if there is no intermediary, the obligation of reporting shifts to the relevant taxpayer.
4. What information must be reported?
The information to report on RCBAs covers:
- For the intermediaries, relevant taxpayers and the latter’s associated enterprises: Taxpayer Identification Number (TIN), date of birth, tax residence etc.;
- For the reported RCBAs: hallmarks, summary, value etc.;
- Identification of the EU Member States and other persons likely to be concerned or affected by the RCBAs.
5. When are the key deadlines?
As of 1st July 2020, RCBAs will have to be reported within 30 days from being made available or ready for implementation, from when the first step of implementation was made or from the day a service provider provided aid, assistance or advice. RCBAs available, ready, or for which the first step of implementation was made between 25 June 2018 and 1st July 2020, will need to be reported by 31 August 2020.
If still unsure, then…
Given the complexity of the new regulations, we have created a short – and non-exhaustive -- checklist of questions which, if answered in the negative, may indicate that you should seek expert advice:
- Are you able to outline all your tax arrangements since June 25, 2018?
- Do you know which arrangements have to be reported under DAC 6?
- Do you know whether the obligation to report to the local tax authority falls on yourself or an intermediary?
- What steps have you taken with your advisors to avoid duplication and ensure consistency of reporting to the tax authorities?Didier-Marie Claes, AEOI & Regulatory Compliance, LuxembourgCitco GSGS Focus – Summer 2019