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EU Mandatory Disclosure regime for cross-border transactions ‘DAC6’
The EU has introduced measures to increase tax transparency to better understand potentially aggressive tax structures. We help you understand the impact of the disclosure rules.
With these measures the EU takes transparency with respect to potentially aggressive tax arrangements to a higher level. The amendment to Directive 2011/16/EU on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (DAC6 for short) has far-reaching consequences for tax advisors, service providers and taxpayers.
DAC6 in 90 seconds- The new EU directive on cross-border tax
DAC6, the EU directive on cross-border tax arrangements, came into force on 25 June 2018. This directive increases transparency requirements cross-border arrangements and prevents against aggressive tax planning. Businesses headquartered in or trading within the EU will need to ensure compliance with DAC6 from 25 June
DAC6 imposes mandatory disclosure requirements for certain arrangements with an EU cross-border element. Where such an arrangement falls within certain "hallmarks" mentioned in the directive and in certain instances where the main or expected benefit of the arrangement is a tax advantage, the arrangement should be reported. There will be a mandatory automatic exchange of information on such reportable cross-border schemes via the Common Communication Network (CCN) which will be set-up by the EU.
On 1 July 2020, the Directive entered into force and the obligation to notify took effect on 1 January 2021. The DAC6 Directive has retroactive effect and therefore also applies to cross-border constructions subject to notification that have taken place since 25 June 2018.
PwC’s viewpoint
In general PwC is supportive of full transparency to the tax authorities. DAC6 however creates an inherent risk of over-reporting as well as under-reporting, because of the potentially broad scope of the hallmarks, the multiple reporting by intermediaries involved and a potential lack of consistent interpretation in the EU member states. PwC called upon the European Commission and the EU Member States to come up with clear and consistent interpretative guidance agreed between the different EU Member States to help limit unnecessarily excessive administrative costs and limit confusion for taxpayers and service providers about their responsibilities.
What does it mean for you?
As our client
Our clients should be able to answer the following questions in relation to all cross-border arrangements:
How to assess what arrangements to report?
- Is a certain tax arrangement a reportable tax arrangement? PwC has developed a tool to support you with recognising those arrangements.
- What controls and processes do you have in place to capture and analyse whether a transaction needs to be reported?
- How will this be monitored where Tax and Finance are not (directly) involved?
- What if an intermediary reports your tax arrangement?
It is important to note that DAC6 does not only capture cross-border tax arrangements that can be perceived as being aggressive, but any cross-border arrangement that meet certain characteristics.
If taxpayers are conducting DAC6 reportable arrangements, they should determine how this fits with their tax policy/strategy.
Who should make the disclosure?
- Are you as a taxpayer required to make the disclosure yourself or are there advisers or other parties involved in the transaction which may already have the obligation to report? In that case, how do you determine if anything is reported on you by the intermediary?
- Please note that if EU based advisers or other service providers are involved, they are likely to have the obligation to report. In that case, you will generally not be required to report yourself. However, if more than one adviser or another third party is involved, they could coordinate between them on who should file a single report for all of them and for that purpose agree on the contents of the report.
- Should you be required to report yourself, PwC can assist you with a reporting solution should you prefer outsourcing over building in-house solutions for DAC6.
What should be disclosed?
- Can you capture the right information from your systems and is this consistent with other filings (e.g. Country-by-Country Reporting)?
- What are third parties disclosing about you and does it coincide with your understanding / disclosure? Please note that PwC (Netherlands) will generally be considered an ‘intermediary’ under DAC6. DAC6 does not require us to inform our clients when PwC is reporting under DAC6. However, we will always engage in a dialogue with our client on the DAC6 impact for each advice or transaction. In those cases where we are required to report, we will inform the client thereof and can provide the details of the report.
- There will be penalties in place for non-compliance. This is both a risk and a reputational issue for taxpayers (as well as for their tax advisers and other service providers).
Remember, information will be shared automatically with all EU Member States.
As intermediary
Intermediaries such as accountants, lawyers, (civil law) notaries, tax advisers and other service providers should be able to answer the following questions:
How to assess what arrangements to report?
- Are you in any way involved in the advice, otherwise making available or wholly or partly in the implementation of a cross-border tax arrangement of your client?
- Does the cross-border arrangement have a tax angle?
- Is the arrangement a reportable tax arrangement?
Who should make the disclosure?
- If the arrangement is reportable, do you as service provider have the obligation to make a report?
- If so, and if other involved service providers also have a reporting obligation, it may be possible to make a single report for all service providers involved. How will it be decided whether a single report will be made? And how will be decided which service provider will do so (coordination)?
- In the case of a single report, can you as service provider agree on the contents of the report made by another other service providers and do you feel comfortable to rely upon that report?
- How will you keep a record of proof that the report is made?
What should be disclosed?
- Can you capture the right information about your client’s arrangements from your files and is the information consistent with other filings made by or on behalf or your client (e.g. Country-by-Country Reporting)?
- Is your client aware of the information, which you are about to disclose and does this coincide with your client’s understanding / disclosure?
- Are you aware of any possible impact of the report on your client’s tax position (e.g. possible follow-up questions from the tax authorities) or, possibly even, his general reputation? Have these possible concerns been discussed with your client?
Remember, information will be shared automatically with all EU Member States.
As Financial Service provider
As the intermediary-definition is very broadly defined, many organisations in the Financial Services industry might be impacted by ‘DAC6’. To assess the potential impact for your organisation and take action to mitigate risks of non-compliance, you can start with the following considerations:
How to assess what arrangements to report?
- What controls and processes do you have in place to capture and analyse whether your products or transactions needs to be reported?
- How will this be monitored?
Who should make the disclosure?
- Which areas within your organisation potentially act as intermediary as they offer products/transactions which are in scope of the hallmarks?
For an outline of the reportable tax arrangements, please click here. - Define the governance structure and assign the various responsibilities under DAC6 (e.g. implementation of processes and controls, monitoring of new clients, products and execution of reporting).
What should be disclosed?
- Can you capture the right information from your systems and is this consistent with other filings?
- Synergies exist between DAC6 and existing reporting requirements of transparency initiatives.
- There will be penalties in place for non-compliance. This is both a risk and a reputational issue.
We can help you leverage existing product approval, client onboarding and/or monitoring processes and controls within your organisation (e.g. AML/KYC, FATCA/CRS, SIRA, etc.).
Reportable tax arrangements
Reportable tax arrangements are arrangements with an EU cross-border element, where the arrangements fall within certain "Hallmarks" mentioned in the directive, and in certain instances where the main or expected benefit of the arrangement is a tax advantage.
- Cross-border arrangements
- Hallmarks
- Main benefit
- Reporting
Cross-border arrangements
Cross-border arrangements are arrangements involving at least two EU jurisdictions, or at least one EU jurisdiction and one or more non-EU jurisdictions. If a tax arrangement only involves one tax jurisdiction or only non-EU tax jurisdictions, the arrangement is not considered to be of a relevant cross-border nature and will then not be reportable.
Hallmarks
The hallmarks describe certain characteristics of arrangements; they are broadly worded and are expected to apply to a wide range of transactions. In some specifically mentioned cases the tax arrangement only becomes reportable if the main or expected benefit of the arrangement is a tax advantage. Important to note is that DAC6 does not only capture cross-border tax arrangements that can be perceived as being aggressive.
General hallmarks
The first type of hallmarks to identify reportable tax arrangements by way of looking at the engagement with the intermediary (e.g. the tax adviser). If the engagement provides for a confidentiality clause, a success fee or the tax arrangement is based on standardised documentation/structures, the tax arrangement may become reportable.
Specific hallmarks
The second type of hallmarks regard the specifics of the tax arrangement itself. Specific hallmarks identify amongst others:
- tax arrangements that are based on the trade and use of loss-making companies,
- the conversion of one type of income or capital into another category of income to be able to use lower tax rates,
- international company restructuring,
- claiming depreciations or double tax relief in more than one jurisdiction or the deduction of payments while the payments are not taxable with the recipient
- arrangements to circumvent reporting obligations or to make the ultimate beneficial owners unidentifiable
- arrangements making use of specifics of transfer pricing rules in various jurisdictions, such as safe harbour rules, the transfer of hard-to-value intangibles, business restructuring resulting in a more than 50% reduction of the effective tax rate.
Main benefit
In most cases the tax arrangement becomes reportable if any of the mentioned hallmarks are met, regardless of whether or not the arrangement leads to a lower tax burden. However, in some cases the tax arrangement is only reportable if the main benefit test is met, meaning that:
the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
Reporting
As of 1 January 2021, the reporting deadlines for the Netherlands came into effect. This date followed the measure of the European Commission which, due to the corona crisis, made postponement possible for the member states. The Netherlands therefore opted for a six-month postponement.
Since 1 January 2021, applicable cross-border tax arrangements must be reported within 30 days after one of the following instances occur:
(a) the reportable cross-border arrangement is made available for implementation; or
(b) the reportable cross-border arrangement is ready for implementation; or
(c) the first step in the implementation of the reportable cross-border arrangement has been made.
This means that transactions where any of the above events have occurred on or after 1 January 2021 must be reported within 30 days.
For cross-border structures subject to reporting of which the first step was implemented between 25 June 2018 and 1 July 2020, the reporting deadline has now passed. Transactions that occurred between 1 July 2020 and 31 December 2020 must be reported by 31 January 2021, at the latest.
The reportable tax arrangements are to be filed with the local tax authorities. Next to that, the EU will set up a system for the mandatory exchange of information on such reportable cross-border schemes via the Common Consolidated Network (CCN). This means that any reportable tax arrangement is going to be shared by the local tax authorities with the tax authorities of all other EU member states. Please note that the information should not become available for public use.
The filing obligation lies primarily with the intermediary who has made the tax arrangement available or is involved in the implementation process (tax adviser, lawyer, or other service provider). If a taxpayer (company or person) has not made use of an intermediary, but has exclusively used its own inhouse tax expertise in respect of the tax arrangement at hand, the reporting obligation shifts to the taxpayer.
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