What Is the DAC6 Mandatory Disclosure Regime?

The European Union (EU)’s DAC6 tax disclosure reporting requirements are now in force. Complying with the new disclosure and information-sharing requirements may pose a host of international tax planning difficulties because of differences in member states’ legal structures and challenges with interpreting various provisions of the directive, including the “main benefit test” and the features or “hallmarks” that result in an arrangement’s being subject to disclosure.

What is DAC6?

Formally known as Council Directive EU/2018/822 of 25 May 2018, DAC6 is an amendment to the European Council’s Directive 2011/16/EU of 15 February 2011.

DAC6 covers the mandatory disclosure and automatic exchange of taxation information among EU member states related to reportable cross-border arrangements. The regulatory thread embodied in DAC6 stems from Action 12 of the OECD’s Base Erosion and Profit Shifting (BEPS) project, finalized in 2015, which aimed to give each jurisdiction timely information on the compliance and policy risks raised by aggressive corporate tax planning strategies.

What needs to be reported under DAC6?

Reportable transactions are defined by the directive’s enumeration of hallmarks that present certain characteristics or features of a cross-border arrangement that suggest a potential risk of tax avoidance. Any cross-border arrangement (i.e., an arrangement that involves more than one EU member state or an EU member state and another country) that contains at least one of these hallmarks must be reported.

Certain arrangements must be reported only if they meet the “main benefit test.” In general, the main benefit test is met if one of the main purposes of a given arrangement is to gain a tax advantage.

DAC6 hallmarks

The hallmarks can be broadly categorized as follows:

• Generic hallmarks linked to the main benefit test. In general, this includes arrangements with a condition of confidentiality, fixed fee arrangements, or standardized arrangements.
• Specific hallmarks linked to the main benefit test. In general, this includes the use of tax losses via acquisition, the conversion of income to equity or other lower tax category, or circular transactions that result in round-tripping of funds.
• Specific hallmarks related to cross-border transactions. Certain arrangements in this category must meet the main benefit test while others don’t.
• Specific hallmarks concerning automatic exchange of information and beneficial ownership.
• Specific hallmarks concerning transfer pricing.

Each of these specific categories contains a lengthy list of potential arrangements (as further described in Annex IV of the EU directive). The tax laws of the individual EU states may add further substance to the hallmarks.

Reportable cross-border arrangements

The information to be reported on cross-border arrangements includes:

• Intermediaries and relevant taxpayers (including name, place of residence, and tax identification number)
• Details of the hallmarks
• Summary of the arrangement
• Date on which the first step of implementation was made
• National provisions that form the basis of the arrangement
• Value of the arrangement
• Member states likely to be affected by the arrangement
• Any other persons likely to be affected by the arrangement

Who is subject to DAC6?

The directive puts the reporting responsibility on EU-based intermediaries, a designation that is broadly interpreted to include anyone who designs, markets, organizes, makes available for implementation, or manages the implementation of a reportable cross-border arrangement, or who provides aid, assistance, or advice. Such intermediaries normally would include tax advisers, accountants, lawyers, consultants, trust companies, and banks that design and/or promote tax planning schemes.

The disclosure requirement is shifted to the relevant taxpayer if no intermediary is involved, or the intermediary is either based outside the EU or exempt from the reporting obligation because it would breach the legal professional privilege under domestic law.

The definition of an intermediary may depend on how individual member states have interpreted the term in their domestic tax laws. Germany, for example, has legislation that includes only advisers directly involved in planning and executing tax-related transactions as intermediaries, and excludes, for example, a bank that only provides funding for the transaction.

What is the DAC6 reporting deadline?

Reportable cross-border arrangements must be reported within a 30-day period from the triggering event. A “triggering event” is the earlier of:

• The day after the reportable cross-border arrangement is made available for implementation
• The day after the reportable cross-border arrangement is ready for implementation
• When the first step in the implementation of the reportable cross-border arrangement has been made

In addition, where certain intermediaries have provided (directly or indirectly) aid, assistance, or advice with respect to designing, marketing, organizing, making available for implementation, or managing the implementation of a reportable cross-border arrangement, they must file a return within 30 days from the day after doing so.

With respect to marketable arrangements (i.e., non-bespoke arrangements), intermediaries must provide the tax authority with updated information on the arrangement every three months.