What is DAC6?
DAC6 refers to the 6th modification of the EU Directive on Administrative Cooperation (DAC) relating to the mandatory automatic exchange of information for tax purposes in relation to reportable cross-border arrangements. Put in simple terms, DAC6 requires tax authorities to be notified of cross-border tax arrangements which satisfy certain ‘hallmarks’.
What is a cross-border arrangement?
A cross border arrangement is an arrangement concerning an EU member state (including the UK) and another country (EU or third country)for which at least one of the following conditions is satisfied:
· Not all participants of the arrangement are tax resident in the same jurisdiction;
· At least one participant in the arrangement is tax resident in more than one jurisdiction;
· At least one participant in the arrangement carries on a business in another jurisdiction through a permanent establishment there and the arrangement forms part or all of the business of that jurisdiction;
· At least one participant in the arrangement who is a tax resident in one jurisdiction carries on an activity in a different jurisdiction without being tax resident or creating a permanent establishment there;
· The arrangement has a possible impact on the automatic exchange of information or the identification of a beneficial owner.
Who will report?
Reporting is done by Intermediaries or by the taxpayers in certain cases.
· Any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement, or
· A person that based on the information in his possession and his relevant expertise and understanding required to provide such services, knows or could be expected to know that such persons have undertaken aid or advice with regards to the above.
In order to be considered an Intermediary as defined above, the person needs to meet at least one of the following additional conditions:
- Tax resident in an EU member state;
- Have a permanent establishment in the EU through which the services with respect to the arrangement are provided;
- Be incorporated in or governed by the law of an EU member state;
- Be registered with a professional association related to legal, taxation or consultancy services in a EU member state.
Any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement.
Reporting is done by the taxpayer only if an Intermediary does not exist or the Intermediary qualifies for exemption under the confidentiality rule (i.e. legal professional privilege, or has notified the reporting obligation to any other Intermediary, or the taxpayer if no other intermediary exists).
What schemes are reportable?
An arrangement is reportable if it meets the above definition of a cross-border arrangement and it falls in the Hallmarks detailed in the next section.
Which are the Hallmarks?
The Directive provides for five specific hallmarks to be used in determining whether a cross border arrangement in reportable or not. In certain cases, the hallmarks have to satisfy the main benefit test in order to be disclosed to the authorities
Main benefit test:
An arrangement for which it can reasonably be expected that the main benefit (or one of the main benefits) to be derived from entering into the arrangement, having regard to all relevant facts and circumstances, is the obtaining of a tax advantage (e.g. tax relief, tax refunds, tax avoidance or reduction of tax liability, postponement of tax or acceleration of tax refund, avoidance of withholding tax etc.)
Category A – Generic Hallmarks linked to Main Benefit Test
1. An arrangement where the taxpayer or a participant, undertakes the obligation to comply with a condition of confidentiality that may require him not to disclose the manner in which the arrangement could secure a tax advantage to other intermediaries or to the Tax Authorities;
2. An arrangement where the Intermediary receives a fee for its services proportionate to the amount of the tax advantage received by the tax payer or a success fee in case that a tax advantage is obtained;
3. An arrangement that has substantially standardized documentation and/or structure and is available to more than one relevant taxpayer without a need to be substantially customized for implementation
Category B – Specific Hallmarks linked to Main Benefit Test
1. The acquisition of loss-making companies and entering into such arrangements for the purpose of benefiting through group tax relief, including the transfer of taxable losses to another jurisdiction or acceleration of such losses;
2. Conversion of income into exempt or lower-taxed revenue streams (such as capital, gifts etc);
3. Circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features;
Category C – Specific Hallmarks related to cross-border transactions
1. Arrangements that involve deductible cross-border transactions between associated enterprises in cases where:
- The recipient is not resident for tax purposes in any jurisdiction or
- The recipient is resident in a tax jurisdiction charging corporate income tax at the rate of 0% or almost 0%, or in a jurisdiction of third-country jurisdictions which is assessed as non-cooperative by the EU or the OECD
- The payment benefits from full exemption from tax in the jurisdiction where the recipient is resident for tax purposes
- The payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes;
2. Tax deductions for the same depreciation of assets are claimed in more than one jurisdiction;
3. Tax relief is claimed for the same income/capital in more than one jurisdiction;
4. Arrangement that includes transfer of assets where there is a material difference in the amount being treated as payable in consideration for the transferred assets in the jurisdictions involved.
For the underlined hallmarks the main benefit test must also be fulfilled
Category D - Specific Hallmarks Concerning the Automatic Exchange of Information and Beneficial Ownership
1. Arrangements that undermine the EU reporting obligations or of equivalent significance reporting obligations in relation to the exchange of Financial Account information, including obligations raised from conventions with 3rd countries
2. Arrangements involving a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures
Category E - Specific Hallmarks Concerning Transfer Pricing
1. Arrangements that involve unilateral safe harbour rules
2. Arrangements that involve transfer of hard-to-value intangibles, subject to conditions
3. An arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 % of the projected annual EBIT of such transferor or transferors if the transfer had not been made
What is reported?
· Identification of all taxpayers and intermediaries involved
· Details of the hallmarks that make the cross-border arrangement reportable
· Summary of the arrangement
· The date on which the first step for implementation of the arrangement has been or will be made
· Details of the national provisions (local law) that form the basis of the arrangement
· The value of the cross border arrangement
· Identification of the Member State of the relevant taxpayer(s) and any other Member States which are likely to be concerned by the arrangement.
· Identification of any other person in a Member State likely to be affected by the arrangement, indicating to which Member States such person is linked.
What are the deadlines?
The deadlines are aligned with the deadlines set by DAC6. However, as a result of the COVID-19 pandemic the deadlines have been extended and no administrative fines will be imposed for late DAC6 submissions provided that the information is submitted by 30 September 2021 in regards to reportable cross borer arrangements that:
· Implemented between 25 June 2018 and 30 June 2020 that were to be reported by 28 February 2021;
· Entered into between 1 July 2020 and 31 December 2020 that were to be reported by 31 January 2021;
· Entered into between 1 January 2021 and 28 February 2021, due to be reported within 30 days from the earlier of the date they were made available for implementation, were ready for implementation, or the first step in the implementation was made; and
· For which secondary intermediaries provide aid, assistance, or advice, between 1 January 2021 and 28 February 2021 and are required to submit information within 30 days beginning on the day after the provision of the aid, assistance, or advice.
A reportable cross border arrangement which takes place from 1 September onward will have to reported within 30 days of its first step of implementation in line with the requirements of DAC6.
What are the penalties for non-compliance?
Penalties for failure to submit information vary from €10.000 to €20.000, whilst fines for overdue submission range between €1.000 to €5.000 for late submission of up to 90 days and €5.000 to €20.000 for late submission exceeding 90 days from the deadline.
DISCLAIMER: The above is intended to provide general guidelines on the subject. It is essential that appropriate professional and legal advice be obtained before proceeding with any actions. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.