As the hottest heatwave this century continues in the U.K., tax advisers are not collapsing due to the heat but due to the latest deluge of anti-avoidance measures.
Just as they were about to set off for the Tuscan hills, safe in the knowledge that urgent matters had been dealt with, a frenemy at a rival firm asks them what internal procedures they have in place for DAC 6? None of course, but they respond vaguely that they understand that DAC 6 has not yet been implemented in the U.K., will probably not survive Brexit and in any event only applies from August 2020 onward.
Wrong on all counts, the frenemy explains.
The U.K. is expected to implement these rules despite Brexit, and they are retroactive, with an obligation to report on transactions implemented from June 25, 2018 onward. Thank goodness for the good wifi connection at the villa!
What is DAC 6?
Drawing on Action 12 of the Organisation for Economic Co-operation and Development’s (“OECD”) base erosion and profit shifting (“BEPS”) project, EU Council Directive 2018/882/EU (known as “DAC 6”) provides for the mandatory disclosure of information by intermediaries on “potentially aggressive tax planning schemes with a cross-border element.” There will be a mandatory automatic exchange of information on such reportable cross-border schemes via the Common Communication Network which will be set up by the EU.
Member states must adopt and publish national laws to comply with DAC 6 by December 31, 2019 and the first information must be reported by August 31, 2020. DAC 6 disclosures should cover any relevant arrangements where the first step was taken after June 25, 2018 (being the date on which DAC 6 entered into force).
However, as the domestic legislation in the U.K. has not yet been implemented and its parameters are therefore unknown, monitoring arrangements from June 25, 2018 onward will be difficult.
DAC 6 applies to cross-border arrangements which concern two EU member states or a member state and a third country. The majority of cross-border transactions with a nexus with a member state will be captured. A cross-border arrangement will be disclosable under DAC 6 if at least one of the Directive’s hallmarks is met. The hallmarks may be specific or generic.
Although many of the hallmarks themselves will automatically trigger a reporting obligation, other hallmarks will only trigger a reporting obligation where the main benefit or one of the main benefits of the arrangement is the obtaining of a tax advantage (the “main benefit test”).
Hallmarks Trigger Reporting Obligation
The hallmarks set out below apply only where the main benefit test is met:
- a fee based on the tax advantage derived from the tax scheme is received by the intermediary; a confidentiality clause is imposed on the participant or the taxpayer or off the shelf standardized documentation and/or structure is used;
- circular transactions which result in funds moving round in a circular fashion occur;
- arrangements convert income into capital (or other low-taxed or exempt revenue);
- a loss-making company is acquired for the purpose of reducing a tax liability;
- deductible cross-border payments are made between associated enterprises designed to exploit jurisdictions where the tax rate is zero or almost zero, there is a full tax exemption or there is a preferential tax regime.
The hallmarks below are automatically reportable:
- relief from double taxation in respect of the same item of income or capital is claimed in different jurisdictions;
- the same asset is subject to depreciation in more than one jurisdiction;
- there is an arrangement that includes a transfer of assets with a material difference in the amount treated as payable in consideration for those assets in the jurisdictions involved;
- deductible cross-border payments are made between associated enterprises which are not fully taxable where received for the following reasons: the recipient is not a tax resident anywhere, or the jurisdictions involved have been assessed by the member states collectively or within the OECD as non-cooperative;
- any scheme designed to circumvent EU legislation or agreements on automatic exchange of information; and
- schemes not conforming to the arm’s-length principle or the OECD’s transfer pricing guidelines.
An “intermediary” is broadly defined as any individual or business engaged in the designing, marketing, organizing, making available for implementation or managing the implementation of, potentially aggressive tax planning arrangements with an EU cross-border element, as well as those who provide aid, assistance and advice. This will include tax advisers, accountants, banks and lawyers, although it is currently unclear if an in-house legal team will be included.
Unlike the U.K.’s domestic Disclosure of Tax Avoidance Schemes (“DOTAS”) disclosure rules, the DAC 6 rules do not include an exemption for in-house advisers. Where there is more than one intermediary involved in the same cross-border arrangement, all of the intermediaries are required to make a disclosure, unless an intermediary has proof that the same information has already been filed by another intermediary. Tax authorities will soon be drowning in a deluge of disclosures.
If the taxpayer develops the reportable cross-border transaction in-house, is advised by a non-EU adviser, or if legal professional privilege applies, the taxpayer must notify the tax authorities directly. This is causing uncertainty, as the ambit of legal professional privilege varies between European Economic Area jurisdictions.
Information to be Reported
The information required to be reported includes:
- full identification of the intermediaries and relevant taxpayers;
- the hallmarks being met;
- a summary of the arrangement, the date on which the first step was implemented and the value of the cross-border arrangement;
- identification of the member state of the relevant taxpayer and other persons likely to be affected by the arrangement.
There are some worrying aspects to DAC 6. It was enacted on an expedited basis in eight months when the normal gestation period for a directive is over two years. The cynic in me questions why there was such a rush.
This has led to many tax advisers and intermediaries who may potentially be affected having no warning about its enactment and therefore having no systems in place to monitor and report on steps from June 25, 2018 onward. Are they already in breach? Will they consequently be liable to penalties (if the U.K. exerts its right to impose them)?
How can advisers and intermediaries fulfill their reporting obligations under DAC 6 when it has not yet been implemented into U.K. domestic law and its parameters are uncertain? Also, the backdoor erosion of legal professional privilege is concerning.
All those potentially affected need to participate in the government consultation on the implementing legislation in 2019 and lobby against the retrospective nature of DAC 6.
- The tax landscape is in flux as a result of BEPS, Brexit and now DAC 6. However, potential intermediaries should proceed on the basis that DAC 6 will be implemented.
- Start setting up systems to monitor cross-border arrangements with the relevant hallmarks from June 25, 2018 onward.
- Seek specialist advice where necessary if there is any doubt about what falls within these rules and what the reporting systems should include.
- Talk with others in the industry and monitor developments to see if other jurisdictions will challenge the retrospective nature of these rules.
- The U.K. government will consult on the implementing legislation in 2019 and affected businesses and representative bodies will have an opportunity to comment and raise concerns. Participate in this consultation process and lobby against the retrospective nature of the rules.
- Finally, always choose a villa with a good wifi connection as you know there is no such thing as a work-free holiday!
Fionnuala Lynch is Head of Tax at McCarthy Denning, U.K.
She may be contacted at: firstname.lastname@example.org