EU Information exchange - Interpreting the European DAC6 Directive
The EU requires Member States to collect information from taxpayers and intermediary service providers regarding cross-border tax arrangements entailing a potential risk of tax avoidance. This information is centralised in a European database, accessible to all European tax administrations, in order to discourage ‘aggressive tax planning’.
The reporting requirements are set out in the Directive on Administrative Cooperation 2018/822 (DAC6), and European Member States had until 31 December 2019 to transpose the Directive into national legislation.
The directive applies to any form of tax levied by, or on behalf of, a Member State, including by local authorities. VAT, customs duties, excise duties and social security contributions are not covered, and these items fall outside the scope of application.
However, European Member States are free to expand the scope to include such exceptions after all, and also to require the reporting of both domestic and cross-border arrangements.
In principle, cross-border arrangements established between 25 June 2018 and 30 June 2020 and subject to a reporting obligation needed to be reported by 31 August 2020 at the latest. For new arrangements (i.e. as from 1 July 2020), the deadline is 30 days after the earliest of:
- The date that the arrangement has been implemented
- The date that the arrangement has been made ready for implementation, or
- When the first step in implementation has been made.
Due to the current circumstances resulting from the COVID-19 pandemic, the EU Council has agreed to extend both deadlines by up to six months, so the deadlines haves now shifted to:
- 30 January 2021 - reportable cross-border arrangements established between 1 July and 31 December 2020
- 28 February 2021 - reportable cross-border arrangements established between 25 June 2018 and 30 June 2020.
Again, it was up to the European Member States to freely decide on applying this extension possibility.
For arrangements established from 1 January 2021, no postponement will be granted and the normal reporting period of 30 calendar days will apply.
Despite political complexities and a caretaker government, Belgium managed to transpose the directive just in time, on 20 December 2019.
In Belgium, the new reporting obligation applies to income tax, miscellaneous duties and taxes, inheritance tax and gift, registration and mortgage duties, as well as court fees. Furthermore, the country is only targeting cross-border arrangements.
Taxpayers and their intermediary service providers who provide incomplete information about cross-border arrangements that are subject to a reporting obligation may be penalised through administrative fines ranging from EUR 1,250 to EUR 12,500. Failure to report or late reporting can lead to a fine of EUR 5,000 to EUR 50,000. In the case of fraudulent action or harmful intent, the limits increase to EUR 2,500 and EUR 25,000, and EUR 12,500 and EUR 100,000, respectively. The administrative fines apply per arrangement and are progressive in nature, with multiple infringements resulting in more severe penalties.
The publication of FAQS last year confirmed that the new law leaves many questions unanswered. The tax administration’s worthy attempt to speak plainly and to answer various key questions spans nearly 60 pages. Unfortunately, the FAQs still fail to clarify all ambiguities. Here is a brief overview of the most important clarifications:
- It is not possible to obtain an advance ruling to determine whether a given cross-border arrangement must be reported.
- The explanatory memorandum states that the simple application of a national tax regime cannot be considered an arrangement. The FAQ confirms this and adds several examples of transactions that are not regarded as arrangements.
- For certain hallmarks, obtaining a tax advantage must be an important motive (the so-called ‘main benefit test’). The FAQ clarifies the need to analyse the arrangement in its entirety to determine this. Possible tax benefits obtained in countries outside the EU must be taken into account as well. Moreover, the administration confirms that the mere application of a foreign tax regime (preferential or otherwise), or mere avoidance of double taxation, won’t meet this criterion in and of itself.
This law also devotes considerable attention to professional secrecy and its limits, which can be invoked by intermediaries to avoid the need to report. In such cases, the obligation shifts to the taxpayer, although the taxpayer may grant the intermediary permission to carry out the required reporting. If the taxpayer withholds permission, the intermediary is still obliged to provide the taxpayer with the necessary information to allow the latter to submit a correct report.
As Belgium opted to adopt the DAC6 Directive’s provisions virtually unchanged, this is a missed opportunity for greater clarity; despite an extensive explanatory memorandum to the Belgian law, many questions remain as well as numerous unresolved practical issues.
The European Commission has announced that it will use the extra time created by the postponement of the reporting deadline to further optimise its international exchange scheme. This will of course also affect the Belgian tax administration’s desired national reporting scheme.
Do you have any questions about the new DAC6 legislation? Are you looking for help with the analysis of your situation? Would you like more information or a demonstration of our reporting tool? If so, please do not hesitate to contact the experts from our Tax team: [email protected].
The law transposing the Directive into Spanish law was published in the Official Gazette on 30 December 2020 and entered into force on 31 December 2020. However, the regulations developing the law and approving the tax forms are still pending, as is any guidance from the tax authorities.
In general terms, the Spanish law follows the Directive, and refers to Annex IV of the Directive regarding the description of the hallmarks, but it also introduces certain nuances that may be decisive in the case-by-case analysis.
From a reporting perspective, in addition to the initial communication that has to be done either by the intermediary or the relevant taxpayer, it is also foreseen that, on the one hand, intermediaries inform quarterly on any change or update made in relation to marketable arrangements disclosed in the past and, on the other hand, the relevant taxpayers will have to report annually, from the year following its implementation onwards, about any reportable cross-border arrangement they might have used in the year subject to declaration.
Regarding the waiver from filing information on a reportable cross-border arrangement due to the application of legal professional privilege, Spain finally decided to extend the benefits of such waiver to any intermediary that qualifies as such in the terms of the Directive, irrespective of their business or entrepreneurial activity. This means that legal professional privilege is not only limited to lawyers or tax advisers, as may be the case in other Member States.
In line with the Directive, the Spanish law clearly also distinguishes between the first level intermediary or promoter, on the one hand, and the second level intermediary or service provider, on the other hand. According to what seems to be the trending interpretation of the wording of the law, the latter will be in the position to apply legal professional privilege, and will not be obliged to inform, whenever the scope of its advice is limited to a neutral advice regarding the alignment of the planned arrangement to Spanish law, without procuring or facilitating its implementation. This leads to the conclusion that the first level intermediary or promoter should in no case be able to waive its obligation to inform under application of legal professional privilege, as it does participate in the promotion and/or implementation of the arrangement. The different scope of application of legal professional privilege within the EU does generate significant uncertainty, and will make it very difficult to decide, especially on cross-border projects where intermediaries from several countries and areas of expertise are collaborating, who is the intermediary that has to report the arrangement, and how they can assure that the filing made by another intermediary is sufficient for Spanish or other EU Member State purposes. Therefore, it cannot be ruled out that several intermediaries finally report the same arrangement in their respective Member States.
The Spanish law also foresees a quite stringent penalty regime, although it may appear not to be so at a first glance. In this regard, failure to file, or filing incomplete or inexact declarations, or including false data, will trigger fines of EUR 2,000 per missing, incomplete, inexact or false data, with a minimum of EUR 4,000 and maximum equivalent to the amount of the fee received or to be received for each arrangement if the perpetrator is the intermediary, or an amount equivalent to the value of the tax effect derived from each arrangement if the perpetrator is the relevant taxpayer. The maximum limit does not apply should it be less than EUR 4.000.
In addition, intermediaries that are exempt from reporting by virtue of professional privilege must communicate such exemption to other intermediaries and relevant taxpayers. Not doing so triggers a fine of EUR 600. However, if the absence of such communication impedes that another intermediary or relevant taxpayer from complying with its filing obligation, the penalty can amount to the maximum fines mentioned in the preceding paragraph.
The intermediaries or relevant taxpayers that are obliged to report, or who have done so by virtue of the law, have to inform other intermediaries and relevant taxpayers. Not doing so, making an incomplete communication, or including false or inexact data, may result in a fine of EUR 600.
Last but not least, not making the mandatory filings through electronic means may trigger a fixed fine of EUR 250 per data or set of data referred to the same arrangement, with a minimum of EUR 750 and a maximum of EUR 1,500.
An unexpected consequence of the UK Government’s negotiations with the EU on a Free Trade Agreement was an abrupt about-face on most of the reporting obligations under DAC6 for UK intermediaries and taxpayers.
HMRC confirmed on 31 December 2020 (i.e. on the eve of the rules taking effect) that the UK would repeal the existing law on DAC6 and replace it with rules implementing the less strict OECD rules on tax transparency.
Businesses, including intermediaries such as accountancy firms, law firms, banks and trustees, will have decidedly mixed feelings about this.
The obligations under DAC6 created a large compliance burden for many businesses, and the suspicion was that this would yield little additional data for tax authorities. The fact that this has been largely removed will be welcomed.
However, the last-minute nature of the change of policy has meant that many organisations will already have spent significant amounts of money and management time preparing for the new rules, including changes to internal reporting systems, training staff, and altering (or buying in) new IT software to enable them to comply.
The OECD rules require reporting of arrangements designed to undermine tax reporting under the common reporting standard (CRS) and transparency rules, in particular:
- Arrangements which have the effect of undermining reporting requirements for the automatic exchange of information, and
- Arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no commercial substance.
UK businesses may still have reporting obligations requiring them to make reports from 31 January 2021 but the number of arrangements that are reportable will be far fewer:
- The existing UK regulations are being amended to remove hallmarks A, B, C, and E. This will considerably reduce the number of arrangements that need to be reported to HMRC.
- Hallmark D will remain in the regulations – this hallmark reflects the OECD rules above.
- Any reportable cross-border arrangements under hallmark D will need to be reported to HMRC along the lines previously envisaged.
- In due course, the existing regulations (based on DAC6) will be replaced by new regulations implementing the OECD rules. This may not alter the thrust of the rules, but the details and process could differ.
- Existing domestic rules (such as the Disclosure of Tax Avoidance Schemes (DOTAS) regime) will continue to apply.
- We assume that HMRC will have no access to the DAC6 data collected by other jurisdictions, although it is possible it may be able to obtain some of this information via existing agreements (e.g. under the Common Reporting Standard).
Businesses that work internationally will still need to be aware of the DAC6 requirements, because these will affect their associated entities in EU territories. Groups that had organised themselves on the basis that UK intermediaries would make any relevant reports will now need to make further changes, because any reporting obligations may instead fall on EU advisers or on the taxpayer entity itself.
DAC6 reporting tool
BDO has developed a DAC6 reporting tool to support taxpayers and intermediary service providers in reporting cross-border tax arrangements. The tool is applicable in all EU Member States. Our experts keep close track of European and national legislative developments, ensuring that your reports always comply with applicable legal provisions.
How does the tool work? Using a practical questionnaire based on the national legislation of the various Member States, you can identify arrangements that are subject to a reporting obligation and create the appropriate reports. These reports can be converted into various file formats for easy submission to the competent tax authorities. Additionally, the tool allows you to monitor and manage your tax obligations for different Member States at a glance.