INSIGHT: The Three Dangers of DAC 6—a Need for Balance

The European Council Directive (EU) 2018/822 (the Directive, DAC 6), was arguably the second most talked-about topic (after taxation of the digital economy) within the international tax community in 2019.

DAC 6, which requires intermediaries and relevant taxpayers (in some cases) to report information about certain cross-border tax arrangements to the tax authorities, has only gained further momentum since December 31, 2019—the formal cut-off date for all EU member states to transpose the provisions of the Directive into their respective domestic tax laws.

At the time of writing this article (February 2020), 19 member states have put in place legislation implementing DAC 6, while seven member states have issued legislation in draft form and are in the process of finalizing the same. Only two member states, Greece and Latvia, have not taken any steps to date to implement DAC 6.

In September 2019, I wrote an article highlighting some of the key problems surrounding DAC 6 and how member states could and should address these problems during the course of finalization of their respective domestic tax rules (back then, only four member states had gazetted legislation on DAC 6).

However, it now appears that all the remaining 15 member states adopted and gazetted drafts of the legislation without careful deliberation, given that some of the glaring glitches continue to remain apparent on the face of the final DAC 6 legislation (perhaps to avoid claims of “improper” implementation by the Commission).

A bare perusal of the Directive (and obviously, the implementing legislation, which closely follows the Directive) reveals that it is increasingly tilted in favor of the tax authority over intermediaries and taxpayers. This is evident from the overly broad and vague (not to mention intentional) choice of words and phrases, the all-encompassing nature of the reporting obligation, and the retroactive application of the reporting requirement.

In this article, I highlight three specific dangers that arise from DAC 6 and why member states must strike the right balance between tax avoidance and taxpayer interests. One way to do this is through issuing detailed and timely guidance on some of the vital components of the DAC 6 legislation.

The Danger of Duplicate Reporting

Perhaps one of the most important industry concerns about DAC 6 is the risk of duplicate reporting. According to the Directive and implementing legislation, the primary reporting obligation falls on intermediaries who must report information that is within their possession and control (unless, of course, legal professional privilege applies).

There are two narrowly drawn exemptions, in cases where more than one intermediary is involved or where the information must be reported in more than one member state. In both these cases, the intermediary is exempt from reporting the information to the tax authority if it provides evidence to establish that the exact same information has been reported by another intermediary, or in another member state.

However, the Commission lost sight of the fact that, in practice, it would be highly burdensome for intermediaries to coordinate with other intermediaries to find out what information has been reported so as to make a prima facie case for seeking the exemption. It cannot also be discounted that, in some limited cases, an intermediary may either deny access to the information, or delay in responding to such kinds of requests. After all, in many cases, one intermediary may not have control over another.

Given the strict deadlines stipulated in the Directive and the implementing legislation and the potential levy of huge penalties for failure or delay in reporting the information to the tax authority, an intermediary will be constrained to report the required information by itself within the deadline and in the prescribed manner and form. This means that there is a real risk of duplicate reporting in some cases: the same information will be reported by more than one intermediary and in multiple member states.

The Danger of Over-Reporting

The Directive and implementing legislation require intermediaries and taxpayers to file the requisite information with the tax authority within 30 days of the earliest of the following three triggering events:

• the day after the reportable cross-border arrangement is made available for implementation;
• the day after the reportable cross-border arrangement is ready for implementation; or
• the day when the first step in the implementation of the reportable cross-border arrangement has been made.

The three trigger events are so vaguely and ambiguously drawn that it is unreasonably cumbersome, if not completely impossible, for intermediaries and taxpayers to keep track of the reporting triggers and, consequently, of the 30-day reporting timeline. The implementing legislation does not specify when an arrangement can be said to have been “made available for implementation” or when an arrangement can be said to be “ready for implementation.” Nor does the legislation specify the meaning of “first step” included in the third trigger stated above.

In addition, some of the specific hallmarks in Annex IV of the Directive (which have been mechanically copied by member states, again to avoid claims of “improper” implementation by the Commission) have been listed in such an overarching manner that intermediaries and taxpayers would effectively need to keep track of arrangements that may, for all practical purposes, have nothing to do with tax avoidance whatsoever. In other words, even purely commercial arrangements would also need to be monitored and reported from time to time.

The consequence is that businesses would err on the side of caution and report information relating to even those arrangements that are not otherwise reportable, in order to avoid potential sanctions for non-reporting or under-reporting. The fear of penalty is such that intermediaries and taxpayers might even report information about arrangements that were subsequently discarded. This serves no purpose, even from the tax authority’s perspective, given that the authority will have to spend its resources on totally irrelevant or extraneous material.

The Danger of Disproportionality

The significance of DAC 6 rests in the fact that it is all-encompassing in nature in terms of broadly worded hallmarks, wide information required to be filed, the obligation to constantly monitor reportable arrangements, and within strict deadlines, and finally, the requirement to constantly coordinate between intermediaries, and between taxpayers and intermediaries.

The Directive leaves it open for member states to prescribe penalties that are “effective, proportionate and dissuasive” in nature. However, it appears that imposing sweeping fines, without taking into consideration the peculiar facts and circumstances of a case, would be unduly harsh and disproportionate when compared to the gravity of the violation.

For instance, the reporting requirement applies even to arrangements the first step of which was implemented between June 2018 and June 2020. Clearly, member states did not have final legislation in place up until December 31, 2019 (in fact, legislation has not been gazetted in nine member states to date) and do not yet have guidance in place (except in a handful of member states).

In addition, many member states have decided not to waive fines even in those cases in which the intermediary or taxpayer took reasonable steps to comply with the DAC 6 legislation (one notable example is the U.K.).

Finally, in cases of service providers, the Directive and implementing legislation provide that information must be reported if they know or are “reasonably expected to know” that they have provided aid, assistance or advice in relation to a reportable cross-border arrangement. Those litigating in courts will appreciate that the word “reasonable” has long been a contested word in law and may be tweaked one way or the other. It is imperative for member states to set out guidance clarifying the level of evidence that would be required for this purpose.

Going Forward

Since DAC 6 legislation is extremely complex and vague, it is harsh and disproportionate to penalize businesses for minor wrongdoings, or unintended non-compliance, or in respect of retroactive application of the reporting requirement.

In view of the above, local governments must consult with stakeholders to ensure that tailored guidance is put in place providing as much clarity and certainty as is necessary and proper to ensure smooth practical implementation of DAC 6 legislation.

Governments must try and strike the right balance between tax avoidance and taxpayer harassment and it is hoped that this is done in a timely manner, given that the DAC 6 legislation will be effective in only few months from now.

Ashish Goel is an international tax lawyer with Comtax, Sweden.

The author may be contacted at ashish.goel@comtaxit.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.