As many of my fellow professionals will already know, the Council Directive 2018/822/EU or its more commonly known name, DAC 6 (the Directive), came into force effective 25 June 2018.
The Directive, which is born out of Action 12 of the OECD’s Base Erosion and Profits Shifting framework (BEPS), looks at tax transparency of cross border transactions and the mandatory reporting of any such arrangements that evidence specific ‘hallmarks’ as detailed within the body of the Directive. Reporting is made to specific competent authorities in member states (so will not be publically available).
With the 25 December 2019 domestic application date moving ever closer, and given that the Directive seeks out not only arrangements that are tax driven but also transactions that could have a potential tax impact, now is a good time to talk about the main implications and how we can help our clients prepare for its implementation.
What arrangements are we talking about here?
An arrangement is deemed to be cross border if it meets any one of the below criteria:
- Not all participants are tax resident in the same jurisdiction
- A permanent establishment linked to any of the participants is established in a different jurisdiction and the arrangement forms part of the business of the permanent establishment
- At least one of the participants in the arrangement carries on activities in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction
- At least one of the participants has dual residency for tax purposes
- Such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership
Which arrangements could be reportable?
An arrangement would need to meet the Main Benefits Test which essentially catches any transaction, for which the main objective is to obtain a tax advantage.
However, arrangements will be reportable if they also meet at least one of the hallmarks which are split into five categories. These are listed as:
- Arrangements that give rise to performance fees or involve mass-marketed schemes
- Transactions/arrangements which exploit losses in order to reduce tax liabilities or converting income into capital to obtain a tax benefit
- Arrangements whereby the recipient is not subject to tax (or imposes low taxes)
- Arrangements that undermine the rules, or the absence thereof, of beneficial ownership
- Arrangements that breach the rules surrounding transfer pricing
The reporting falls on intermediaries or in some cases, the taxpayer themselves. So, what is the definition of an intermediary?
The broad scope of the definition means that a large number of those involved are potentially ‘intermediaries’. These include:
- Consultants, accountants, financial advisers, lawyers (including in-house counsel)
- Banks, trust companies, insurance intermediaries
- Holding companies, group treasury functions
This only includes intermediaries with a connection to the EU, which is usually determined by tax residence/registration.
Where there are multiple intermediaries involved, all are required to report unless an agreement is reached and can be evidenced whereby one intermediary takes on the responsibility of reporting for all.
How to be prepared
- Each arrangement implemented from 25 June 2018 needs to be carefully considered and monitored and advice taken where necessary to ensure that it does not fall foul of the Directive
- A record/register should be maintained of any arrangement or transaction that could be reportable, for review on a regular basis
What is PraxisIFM doing?
We are currently reviewing all cross border arrangements that we are involved in or are aware of to ensure that the rationale for these arrangements is documented accordingly.
Where we feel that a transaction could be reportable, we will contact our client directly to ensure they are aware of the requirement and to set out what information may need to be disclosed.
We are also able to assist clients with maintaining a separate register for potentially reportable transactions and to support clients with reporting obligations.
We will also be sending out a further communication once domestic implementation is effective to ensure clients are prepared in advance for any disclosures.
Please contact Donna for further details.