Less than four months remain before all EU member states will need to have in place detailed domestic tax rules implementing Council Directive (EU) 2018/822 (commonly known as “DAC6”), which requires intermediaries and relevant taxpayers (in some cases) to report information about certain cross-border tax arrangements to the tax authorities.
Problems of Definition
While the Directive is only a few pages long, it includes provisions that will encounter numerous interpretational problems going forward. For instance, the text of the Directive does not give meaning to key terms such as “participant,” “tax advantage,” “arrangement,” “made available for implementation,” and “ready for implementation,” among others.
In addition, the Directive leaves a sword of uncertainty and ambiguity hanging over businesses in relation to several other aspects, specifically in relation to the treatment of in-house employees, and with respect to the reporting deadlines in situations where professional secrecy privilege applies.
Given that domestic tax legislation would be published in local, non-English texts (except, of course, in the U.K and Ireland), the complexity of the rules will be further heightened for English-speaking tax directors and CFOs of non-EU parent companies with EU subsidiaries who wish to micro-manage compliance with the local mandatory tax disclosure rules.
Unfortunately, rules enacted (or proposed) in some member states do not provide much clarity with respect to some of these aspects and seem largely to copy the bare text of the Directive.
Only three member states—Denmark, Germany and Slovenia—seem to explain the term “arrangement.” Czech Republic and the Netherlands seem to be the only member states to explain the term “participant.” The U.K. seems to be the only country to explain the phrase “made available for implementation.” Finally, Austria, Czech Republic, Germany, Italy, Slovenia, Spain, the Netherlands, and the U.K. seem to be the only member states to clarify that the term “tax advantage” would be drawn from that underlined by the European Commission in the 2012 Recommendation on Aggressive Tax Planning.
Ambiguous Reporting Deadlines
Although the primary reporting obligation lies with the intermediary, the obligation shifts onto the relevant taxpayer in situations where there is no intermediary (for example when a tax arrangement is designed and implemented in-house) or where the intermediary is bound by professional secrecy privilege under the national law of a member state.
Under the Directive, and as reflected in local legislation (enacted or proposed), the taxpayer is required to report information about a reportable tax arrangement within 30 days from the day after the arrangement is made available for implementation, is ready for implementation, or the first step of which has been implemented. Importantly, this deadline is not entirely clear in situations where an intermediary who is bound by professional secrecy privilege is involved.
There are at least two notable exceptions. The Netherlands has provided that in cases where professional secrecy privilege applies, the taxpayer must make a notification within 30 days from the date on which it received information from the intermediary. Spain, too, is likely to specify in its final legislation that an intermediary must communicate to the taxpayer within five days from the date on which an obligation to report arises.
Next, the Directive notes that intermediaries must notify the taxpayer of a waiver due to privilege “without delay.” Neither the Directive nor domestic tax laws (enacted or proposed) specify the meaning of “without delay” and no specific time lines have been stipulated in this regard.
Again, it is not clear what would happen in situations where the taxpayer did not receive a notice of waiver from the intermediary, or received it in a delayed or haphazard manner. Apart from Portugal, member states that have published draft bills so far do not seem to expressly provide for extensions in such situations.
The Directive requires member states to incorporate a penalty regime that is “effective, proportionate and dissuasive.” These are vague terms, and the result is that member states have uniformly incorporated (or proposed) a penalty regime and fines for non-compliance, with the reporting obligation seeming to vary from 2,000 euros ($2,186) (in Italy) to over 4.5 million euros (in Poland).
In general, member states seem to make the levying of fines absolute and do not provide an exception based on reasonable cause. Pertinently, the U.K. seems to be the only member state that would not penalize unreported arrangements the first step of which was implemented from June 2018 to June 2020.
It may be relevant to mention here that the Directive lists six categories of hallmarks but does not provide adequate guidance on how these hallmarks should or would be interpreted in practice. Most member states have rushed to incorporate these hallmarks in verbatim without adequate guidance (with some member states such as Poland and Portugal adding new ones).
There is a genuine concern that those required to report arrangements, especially relevant taxpayers, may not have the requisite expertise to discern if an arrangement in fact triggered a reporting obligation: all the more so given that local legislation is not likely to provide any exemption from fines where a relevant taxpayer or intermediary genuinely could not figure out if an arrangement was indeed reportable or not.
Issues Concerning Legal Privilege and Self-incrimination
Last but not least, implementation of the Directive would pose challenges to the principle of professional secrecy privilege and the right against self-incrimination. There is a danger that member states may seek to obtain access to privileged information indirectly which they otherwise could not access directly. The draft legislation in Portugal goes one step further to note that such a privilege would not apply at all.
Tax avoidance arrangements are usually outside the scope of criminal law; however, there might be situations where a disclosed tax arrangement involves an element of tax fraud, potentially leading to a criminal charge. In such cases, intermediaries and relevant taxpayers should ordinarily be exempt from reporting self-incriminatory information to the tax authority. However, except for Italy, member states in general do not seem to expressly provide for such an exemption.
As on September 10, 24 member states are yet to implement legislation to fully transpose the provisions of the Directive into their domestic tax laws (Hungary, Lithuania, Poland, and Slovenia have already done so). It is hoped that these member states allay business concerns and address the issues described above during the process of finalization of the rules.
Ashish Goel is an international tax lawyer.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners