Implementation of new mandatory reporting rules (DAC6) – current status in the EU

On 25 May 2018 the EU Council published a directive amending Directive 2011/16/EU on the automatic exchange of information, which is known as DAC6. The amendment refers to the introduction of a new reporting obligation for cross-border tax arrangements that may potentially be regarded as aggressive and politically undesirable.

EU-wide implementation of new mandatory disclosure rules

The EU Member States are obliged to transpose mandatory reporting rules for potentially aggressive tax planning schemes (tax arrangements) into domestic law by 31 December 2019.

While the latest amendment of the European Directive on Administrative Cooperation 2018/822 (“DAC6”) proposes a uniform mandatory disclosure rule framework, it can be expected that national implementation will result in a non-uniform set of rules, which calls for an adequate coordination amongst involved intermediaries.

The purpose of the DAC6 Taxand newsletter is to give you an overview of where things stand (as at 22 November 2019) across the European jurisdictions impacted by DAC6.

Background

A tax arrangement is reportable if:

• it is a “cross-border tax arrangement”, and
• certain hallmarks as stipulated in Annex IV of DAC6 are fulfilled.

The hallmarks, which are grouped into five categories (A to E), aim to cover generic and specific characteristics as well as certain consequences of tax planning. These hallmarks encompass compliant but politically undesirable tax planning structures, i.e. structures that have not crossed the line between legal tax planning and abusive tax planning or even tax evasion.

• Category A focuses on the advisor-client relationship (e.g. confidentiality agreements, remuneration) and the nature of tax structures (e.g. highly standardized structures).
• Category B addresses specific results of tax structures (e.g. double deduction of depreciation amounts, low-taxed payments).
• Category C deals with cross-border payments in a controlled situation (e.g. tax-exempt payments received from a related party).
• Category D focuses on situations in which the reporting of financial accounts under CRS is avoided and certain cases of economic ownership structures.
• Category E deals with selected transfer pricing matters.

The hallmarks of Categories A, B and, to some extent, C give rise to a reporting obligation only if the “main benefit test” is satisfied. This refers to whether it can be established that the main benefit or one of the main benefits which a person may reasonably expect to derive from an arrangement is obtaining a tax advantage. Therefore, DAC6 distinguish between hallmarks that lead to a reporting obligation once objective characteristics are fulfilled (Categories C to E) and those for which an additional subjective characteristic (i.e. a taxpayer’s intention) must be satisfied (Categories A to C).

The main targets of the reporting obligation under DAC6 are not the taxpayers themselves, but their advisors and financial service providers (intermediaries) who contribute to the creation or implementation of reportable tax planning structures. An intermediary is any person who designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border tax arrangement. The reporting obligation is limited to those intermediaries who are resident or have a permanent establishment in an EU Member State, in particular. DAC6 gives EU Member States the option to exempt intermediaries from the mandatory reporting obligation where it would breach legal professional privilege.