The EU has agreed that, as a result of the Covid-19 pandemic, EU member states may delay by six months the reporting obligation in relation to a new EU regime requiring the disclosure of cross-border tax schemes. The deferral is optional and whilst most member states have decided to defer, a few have not.
EU Directive 2018/822 amending Directive 2011/16, commonly known as “DAC6,” is required to be applied by EU member states from July 1, 2020. It is designed to enable EU tax authorities to automatically share information about cross-border tax schemes, to provide the authorities with timely information about schemes which have been devised, so that they can investigate, and if necessary close loopholes in their tax rules. Although aimed at potentially aggressive tax arrangements, it has a much wider ambit than this.
The primary reporting obligation falls on “intermediaries.” This is very widely defined and includes those who design and market cross-border arrangements as well as those who provide aid, assistance or advice in respect of such arrangements. This will cover not just a professional adviser which devises or promotes a tax structure, but also any advisers or other professionals involved in implementing the arrangements and potentially those providing funding.
However, those with a more peripheral role in the arrangements will not be intermediaries if they do not know or could not reasonably be expected to know they were involved in a reportable arrangement. An EU-based taxpayer itself will be obliged to make the report if there is no EU intermediary or if the intermediary is prevented from making the disclosure by legal privilege.
A cross-border arrangement will be reportable if it bears one of the specified “hallmarks,” and there are five categories of hallmark. Hallmarks are designed to catch indicators of tax avoidance, such as wanting to keep the arrangements secret from tax authorities. Some of the hallmarks are only triggered where the arrangements satisfy a “main benefit” test. This will be satisfied if it can be established, having regard to all relevant facts and circumstances, that the main benefit or one of the main benefits which a person may reasonably expect to derive from the arrangements is the obtaining of a tax advantage.
However, some hallmarks may be triggered where there is no tax avoidance motive, or indeed any tax advantage. This is a particular concern in relation to intra group cross-border reorganizations.
Deferral of Reporting Obligations
Although DAC6 implementing legislation in member states is only required to apply from July 1, 2020, cross-border arrangements entered into since June 25, 2018 will need to be reported. Reports for arrangements entered into from June 25, 2018 to June 30, 2020 were originally due under DAC6 by August 31, 2020. Member states can now opt to defer this reporting obligation until February 28, 2021.
Arrangements which are entered into between July 1, 2020 and December 31, 2020 must now be reported within the period of 30 days beginning on January 1, 2021, if member states have opted for the six-month deferral. Under the original rules, such arrangements would have had to be reported within 30 days of the reporting trigger point being reached.
Arrangements which become reportable on or after January 1, 2021 must be reported as normal, within 30 days.
The 30-day period begins on the earliest of the day after the arrangement is made available for implementation, is ready for implementation, or the first step in the implementation has been made. Intermediaries who are “service providers”—that is, they provide aid, assistance or advice, rather than being the person actually designing or promoting the scheme—have a reporting obligation within 30 days of providing aid, assistance or advice.
Although the EU has now agreed to a six-month deferral, when the European Commission first published its deferral proposals in May 2020 it was proposing that the reporting obligations be postponed by only three months. However, member states pushed for a longer period and reached agreement on a six-month deferral.
The U.K. has enacted its legislation implementing the six-month deferral. Most other EU countries, including France, Spain, Ireland, Luxembourg and the Netherlands have either implemented the deferral or are in the process of doing so. However, Austria, Finland and Germany have indicated that they are not going to take up the deferral option.
The German decision not to defer was communicated by the German Ministry of Finance in a press conference on July 6 and came as a surprise, because a deferral had been widely expected, particularly as legislation is already in place authorizing the Ministry of Finance to defer the reporting obligation in accordance with the EU rules. The decision not to defer has caused controversy in Germany and we understand the Ministry of Finance is being lobbied in an attempt to change its mind.
Although Austria has not opted for the EU’s six-month deferral, guidance issued by the Austrian Ministry of Finance states that as the electronic reporting tool for DAC6 will not be ready until October, reports can be filed by October 31, 2020 without penalty. In practical terms there is therefore an extension of the deadline until then.
Poland has opted for deferral, but on a slightly different basis to other countries. Poland implemented disclosure rules early covering both domestic and cross-border arrangements. New rules enacted in June mean that reports in respect of cross-border arrangements already submitted under the previous regime will have to be resubmitted. The deadlines have been deferred but are different depending upon whether the person reporting is a promoter, the taxpayer or a service provider. For arrangements taking place between June 26, 2018 and June 30, 2020 the deadlines are December 31, 2020 for the promoter, January 31, 2021 for the taxpayer and February 28, 2021 for a service provider. Other time limits run from January 1, 2021.
At the time of writing, it is not clear whether Italy and Portugal will opt for the deferral.
As it is uncertain how long the Covid-19 pandemic will last and whether further lockdowns will be required, under the current rules the European Commission can decide to allow member states to have one further three-month extension of the deferral period. This will be reviewed one month before the end of the new deadlines.
Some anti-tax avoidance campaigners have criticized the deferral, suggesting that the coronavirus pandemic is being used as an excuse to delay measures aimed at combating tax avoidance and citing the fact that the Directive has been in force since June 25, 2018.
Position of U.K. Post-Brexit
While the U.K. is within the Brexit transition period, due to end on December 31, 2020, it is treated as an EU member state for the purposes of DAC6. The deferral of the reporting deadlines means that the first exchanges of information between member states will take place after the Brexit transition period has ended. Depending on what, if anything, is agreed with the EU, further changes to the U.K.'s regulations may be needed once the transition period ends and it is not yet clear what the mechanism will be for exchanges of information reported under DAC6 between the U.K. and EU member states after December 31, 2020.
The deferral of the deadlines is good news for those who may have reporting obligations. Although DAC6 has been in force for two years now, member states have been slow to implement the rules into their domestic law and to issue guidance as to how it will be applied in practice. As DAC6 has a very wide ambit, advisers and other intermediaries such as banks have been working with tax authorities to try to ensure that the rules are applied in a way that catches aggressive tax avoidance schemes as intended, but does not require the reporting of huge volumes of standard arrangements which will be of no interest to tax authorities, and also that duplicate reporting by intermediaries is minimized.
Those operating in countries which have not opted for the deferral need to ensure that they are ready to make reports by the original deadlines.
Those intermediaries who may have DAC6 reporting obligations and are based in a country which has taken up the deferral should use the delay to get their procedures and policies in place to ensure they will be able to comply with their obligations in 2021. If they have not done so already, they will need to look back over two years at arrangements they have been involved in since June 25, 2018. The longer this is left, the harder it will be to do.
Catherine Robins is a Partner with Pinsent Masons.
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