The reporting requirements of the new tax disclosure regime that began July 1 under the EU’s DAC6 directive have been delayed in most of the member states by the Covid-19 pandemic. Complying with the new disclosure and information sharing requirements may pose a host of difficulties linked to differences in the legal structures of the member states and challenges in 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?
DAC6, formally known as Council Directive EU/2018/822 of 25 May 2018, is a recent amendment to the European Council’s Directive 2011/16/EU of 15 February 2011. DAC6 covers the mandatory disclosure and automatic exchange of information among EU states in the field of taxation 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 project, finalized in 2015, which aimed at giving each jurisdiction timely information on the compliance and policy risks raised by aggressive tax planning.
DAC6 called for EU member states to transpose the directive’s provisions into their respective domestic tax laws not later than Dec. 31, 2019. Mandatory reporting of the cross-border reportable arrangements was to begin July 1, 2020, with retroactive reporting of historical arrangements (where the first step of implementation was taken during the period from June 25, 2018, to June 30, 2020) due on Aug. 31, 2020. The EU in June announced an agreement among the member states to allow the optional delay of the reporting deadlines in response to the impact of the Covid-19 pandemic.
Who has a reporting obligation under 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 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 based outside the EU or the intermediary is 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 types of tax arrangements must be reported under DAC6?
The reporting obligation is 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.
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Certain arrangements have to 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.
The hallmarks can be broadly categorized as follows:
generic hallmarks linked to the main benefit test (in general, includes arrangements with a condition of confidentiality, fixed fee arrangements, or standardized arrangements)
specific hallmarks linked to the main benefit test (in general, 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 do not)
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.
What information is disclosed with respect to the reportable cross-border tax arrangements?
The information to be reported on cross-border arrangements includes:
the intermediaries and relevant taxpayers (including name, place of residence, and tax identification number)
details of the hallmarks
summary of the arrangement
the date on which the first step of implementation was made
national provisions that form the basis of the arrangement
the value of the arrangement
member states likely to be affected by the arrangement
any other persons likely to be affected by the arrangement
What are the due dates for the various DAC6 reporting obligations?
Under the 2018 directive, from July 1, 2020, intermediaries were required to disclose any reportable cross-border arrangement within 30 days of a triggering event. All historical arrangements in which the first step of implementation was completed between June 25, 2018, and June 30, 2020, were to be reported not later than Aug. 31, 2020.
Under an amendment to the directive announced in June because of the Covid-19 pandemic, member states may opt to delay reporting by up to six months. For countries implementing the six-month extension, this means the 30-day reporting period for reportable arrangements will begin on Jan. 1, 2021, and intermediaries will have to report, within 30 days of that date, all arrangements from July 1 to Dec. 31, 2020. The report covering the period June 25, 2018, to June 30, 2020, will be due not later than Feb. 28, 2021.
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The directive required that each EU member state adopt and publish the laws, regulations, and administrative procedures necessary to transpose and implement the DAC6 directive.
The provisions of the DAC6 directive are very broad, which allows the member states to individually interpret and implement certain aspects of the directive. Differences between countries may exist, and could include measures expanding the scope of taxes covered (e.g., VAT); expanding the scope of arrangements covered (e.g., domestic arrangements); including a legal professional privilege exemption based on domestic law; more broadly defining the hallmarks; enacting an earlier entry into force date; or imposing a varying range of penalties for noncompliance.
For example, Poland’s legislation expands the DAC6 reporting requirements to include domestic transactions and VAT, and it also includes an earlier effective date.
How does the exchange of information occur between EU member states?
The competent authority of the member state where the information was filed will automatically exchange the information with the competent authorities of the other member states through the automatic information exchange protocols (i.e., the reported information will become part of a centralized database accessible by the tax authorities of all member states). The automatic exchange of reported information must take place within one month after the end of the quarter in which the information is reported.
The first information will be exchanged by April 30, 2021, for member states that opted for the six-month delay to the reporting deadlines (and Oct. 31, 2020, for the member states that did not opt to delay the reporting deadlines).
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