INSIGHT: The DAC6 Transparency Rules—Not Crystal Clear!

EU Directive 2018/822/EU (known as DAC6), which amends Directive 2011/16/EU regarding the mandatory automatic exchange of information in the field of taxation, requires an EU intermediary supplying a reportable cross-border arrangement containing one or more “hallmarks” to disclose the scheme to the intermediary’s tax authority within a 30-day turnaround period.

Member states must pass implementing legislation by December 31, 2019, with enforcement of the Directive to begin by July 1, 2020.

A retrospective “catch-up” provision exists for reportable cross-border arrangements entered into between June 25, 2018 (the date on which DAC6 entered into force) and July 1, 2020. Information on these arrangements must be disclosed to the tax authority by August 31, 2020. Interestingly, there were concerns that this retroactive aspect could be considered unconstitutional in certain EU countries.

Member states are required to automatically exchange reported information with each other, via a centralized database, within one month of the end of the quarter in which the information is filed. The first information is to be exchanged by October 31, 2020 and will include those arrangements caught retrospectively.

Potential Problems

DAC6 is drafted in wide terms and provides tax advisers and their clients with a host of uncertainties; much will depend on how individual member states finally implement the Directive into local law. As with Poland, for example, countries may decide to broaden the scope of reportable transactions, widen the definition of taxes covered or bring forward their reporting dates. The Polish mandatory disclosure regime implements DAC6 from January 1, 2019, with a subsequent June 30 deadline for retrospective reporting by intermediaries. Reporting in Poland also applies to domestic tax schemes, as with the proposed German and Swedish regimes.

Although the stated aim of the European Commission is to tackle aggressive cross-border tax planning arrangements, there are concerns that the widely targeted hallmarks catch standard transactions falling outside the Commission’s sights and even some without a tax motivation. Such uncertainty will likely lead to high levels of detailed reporting as intermediaries struggle with compliance and seek to avoid potentially significant penalties (in Poland up to 10 million zloty ($2.6 million) in some circumstances). Tax authorities too may become inundated with data. The Directive does not mitigate the compliance burden by providing for any de minimis or safe harbor reliefs, although member states are free to include such provisions in domestic legislation.

Further uncertainty exists over those actually subject to the reporting requirement.

The term “intermediaries” is broadly drafted, and it is not clear, for example, whether an in-house legal team advising on a cross-border arrangement falls within the definition. Also, in the case of arrangements involving multiple intermediaries, each intermediary is required to report, unless it has proof that the same information has already been filed in another member state. Parties to such an arrangement should consider formally setting out who will be responsible for reporting. In certain situations, the taxpayer will carry the reporting responsibility (for example, where filing of information by the intermediary breaches legal professional privilege), so both intermediaries and taxpayers should be aware of their reporting obligations and also whether the retrospective provisions apply to existing arrangements.

Planning Points

DAC6 poses a number of practical challenges, confounded by the current lack of implementing legislation. The retrospective reporting requirement nevertheless renders it effective now.

Tax advisers and their clients should therefore review any cross-border arrangements implemented from June 25, 2018, to determine if they are reportable, and assess the systems and IT solutions that they require to track compliance going forward.

Taxpayers with EU operations, and potential intermediaries, should also closely monitor implementation of domestic legislation, and assess any actions needed, as implementation of the minimum standards contained in the Directive will vary throughout the EU. An arrangement could, for example, be considered non-reportable in one member state but reportable in another, and as seen with Poland, reporting dates may vary.

Taxpayers should note that DAC6 clearly states that failure by a tax authority to react to a reported cross-border arrangement does not imply acceptance of its validity or tax treatment. There is no suggestion, however, of any penalty for simply participating in a reportable arrangement.

Robert Walker is a Technical Editor at Bloomberg Tax, London.