June 26, 2020
The obligations falling on taxpayers in Europe to provide information to tax authorities have increased in scope significantly in recent years.
Those obligations are now about to become more onerous, thanks to a European Directive known as “DAC 6,” which takes such reporting to the next level.
A. Summary
DAC 6 imposes an obligation on European Union (EU) based taxpayers and their advisers to report certain types of transactions to their domestic tax authorities for onward sharing with other tax authorities in the EU.
In many cases tax planning need not play a significant role in reportable arrangements–and some types of arrangements must be reported even if they involve no tax benefit at all.
The new provisions come into force as of 1 July 2020, although the European Commission has proposed that the reporting deadlines should be delayed in light of Covid-19.
And, despite Brexit, the UK remains required to implement the Directive until at least 31 December 2020 (and may elect to do so beyond then).
B. Who Must Report, and What Types of Transactions are Covered?
The starting point is that, to be reportable, a transaction must constitute a cross-border arrangement: this is an arrangement which involves at least two jurisdictions, one of which is an EU Member State.
If reportable and an intermediary is involved in the transaction, the transaction will need to be disclosed by that intermediary, otherwise the report will need to be made by the taxpayer itself.
Intermediaries are either “promoters”–who design, market or make available the arrangement for implementation–or “service providers,” a broad category of advisers including lawyers, accountants, structurers, corporate financiers, banks and corporate service providers.
Reporting obligations fall on intermediaries if they are resident, incorporated, have a permanent establishment or are registered professionally in an EU Member State.
Although the rules are derived from an EU Directive, some EU Member States have gone beyond the requirements of the Directive in certain respects when implementing it into their domestic rules; the interpretation of certain key features of the regime will therefore not be uniform throughout the EU.
The Five Hallmarks
The detailed piece of analysis, as to whether a particular transaction is reportable, will be around the hallmarks. There are five of these.
Some of the hallmarks–but, importantly, not all–are subject to a “main benefit test,” i.e., the condition that one of the main benefits must be the obtaining of a tax advantage.
Hallmark A
This applies where any of the following is present:
The main benefit test does apply to this hallmark.
Hallmark B
This hallmark targets the following specific types of features of a transaction:
The main benefit test does apply to this hallmark.
Hallmark C
This hallmark targets “arbitrage,” in the sense of a mismatch in the tax treatment of a transaction in two jurisdictions, or the attempt to obtain essentially the same tax benefit twice.
The first type of transaction involves associated parties (25%+ common ownership) and the creation of a tax-deductible cross-border payment in circumstances where any of the following applies:
Separately, this hallmark also targets the following features (which do not require the presence of associated parties):
Hallmark D
This hallmark targets arrangements aiming to avoid a disclosure obligation under any EU disclosure rules, or which aim to obscure the identity of the ultimate beneficial owner.
The main benefit test does not apply to this hallmark.
Hallmark E
This hallmark targets transactions which:
The main benefit test does not apply to this hallmark.
The scope of the third of these targeted transaction categories is extremely broad; for example, it could apply to an intragroup asset transfer consisting of a transfer of shares, or part of or the whole of a business. A reduction in EBIT of the nature described above would suffice to make the arrangement reportable.
C. What Needs to be Disclosed
If disclosure is required, the following features of the arrangements will need to be reported to the relevant tax authority:
D. Timing and Next Steps
The UK rules implementing the Directive came into force on July 1.
However the UK has, along with a number of other jurisdictions, decided to delay the reporting deadlines in view of the Covid-19 pandemic.
The key timings are consequently now as follows:
Notwithstanding this welcome postponement of the reporting deadlines, it is important that taxpayers and intermediaries alike familiarise themselves sooner rather than later with the DAC 6 rules, and put in place internal systems to ensure that in-scope cross-border transactions undergo review from the DAC 6 perspective in the light of the hallmarks summarised above.
Hunton Andrews Kurth will be pleased to advise as to the potential relevance of these rules to any particular transaction..