Recent times have seen a concerted shift towards increased international tax transparency. This is partly in response to the OECD BEPS Action 12 (mandatory disclosure rules for aggressive tax planning schemes) and the adoption of the Common Reporting Standard, which introduced the automatic exchange of tax and financial information on a global stage.
EU Member States are now grappling with latest EU directive looking at cross-border tax planning arrangements, known as 'DAC6', which is aimed at "intermediaries" (including law firms, accountants and tax advisors). We highlight below some of the main features of the directive and why it is a hot topic for advisors and taxpayers right now.
What is DAC6?
DAC6 introduced mandatory disclosure rules for intermediaries in respect of certain tax advantaged cross-border arrangements affecting at least one EU Member State. To fall within the rules, the arrangements must contain one of a number of "hallmarks" (broadly speaking a list of the features of transactions that present a strong indication of tax avoidance). There will be penalties for those failing to comply with the rules. In certain circumstances, the obligation to disclosure can also fall onto the taxpayer (as we discuss below).
Although some of hallmarks have a "main benefit" test which will be met if obtaining a tax advantage constitutes the main benefit (or one of the main benefits) of the arrangement, some hallmarks (including hallmarks relating to certain transfer pricing issues) do not. Therefore, even if the arrangements are not purely tax-driven, the parties involved will still need to consider DAC6 disclosure. Intermediaries are hoping that further guidance expected from the local tax authorities may clarify the application of the hallmarks and potentially limit the scope of what arrangements need to be reported, but this cannot be guaranteed. The rules may apply even if the arrangements are designed to avoid non-EU taxes.
Who does DAC6 apply to?
DAC6 applies to "intermediaries", which includes anyone who designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement. This means that DAC6 is particularly relevant for lawyers, in-house counsel, accountants and financial advisers. As there is no exclusion for companies providing services to other group companies, multinational companies that might have in-house tax functions advising their group companies will also need to consider whether they are in scope.
There are a number of limitations to the disclosure obligation, for example in relation to legal advisors where legal professional privilege applies or where a number of intermediaries are involved (as only one must make the disclosure). However, if a legal adviser is not required to disclose the arrangement because of legal professional privilege, the taxpayer itself may need to disclose the arrangements.
What do intermediaries need to do now?
DAC6 entered into force in June 2018 and so intermediaries involved in cross-border arrangements with an EU element need to consider the application of DAC6 now. Although the first disclosures under DAC6 will not be required to be made to local tax authorities until 31 August 2020 (with the first exchange of information between tax authorities taking place on 31 October 2020), the intermediary will be required to disclose relevant arrangements where the first step was taken on or after 25 June 2018. Consequently, those intermediaries affected by DAC6 should already be considering what processes they have in place to capture the detail of reportable transactions and inform taxpayers of any obligation to report that they may have.