Mandatory disclosure, or DAC6 as it's commonly known, is the requirement for the reporting of European transactions or arrangements which are defined as 'tax aggressive'. Ciara Smith, Head of Regulatory Compliance Services, discusses who you can prepare ahead of the upcoming regulation coming in.
Firstly, the basics
Strengthen tax transparency and EU cooperation to address aggressive tax planning. Each Member State will automatically exchange the information to the competent authorities of all other Member States through a centralised database.
Any transaction between two countries (where at least one is in the EU) and it meets specific criteria which have been specified as indicating aggressive tax planning.
All EU based intermediaries or, in some scenarios, this could fall to taxpayer where legal privilege is in place.
All EU countries must have implemented DAC6 into local law by 1 July 2020. Reporting begins from that date with the first deadline for reporting as August 2020 and the regulation applies, with retrospective effect, from 25 June 2018.
This legislation has the potential for significant impact to the financial industry and, in particular, those with cross border entity structures. This is of course a significant portion of the financial world. Although targeted primarily at large corporate transactions, but with the potential for a much wider reach, the regulation is commonly referred to as "the next FATCA/CRS" and is the latest in the series of regulations aimed at targeted prevention of tax avoidance. Although a lot is still to be clarified, based on what's known this will be viewed as a doing not only as it 'says on the tin' but possibly a lot more. Although targeted at aggressive tax structures, this newest obligation captures significantly more with the hope that behaviours will be influenced.
So, what do we know?
Firstly, we know the details of the EU legislation. There's a lot of detail, mainly around how to analyse structures and transactions (also known as an arrangement). The directives contain specific "hallmarks", which are indicators that an arrangement should be reported. Also it prescribes certain instances where the main or expected benefit of the arrangement is a tax advantage.
What don't we know?
Most of what we don't know is around local implementations and the practical application of this process in 'business as usual'. Although Poland has already introduced the regulation a lot earlier, and with a much wider scope than was originally expected, most jurisdictions still have some way to go before implementation. Some jurisdictions are further along than others and have already submitted draft legislation such as Italy, Lithuania, Sweden, Cyprus and the Netherlands.
Some of the key open questions include:
- Will all countries follow Poland and include domestic
This would be a substantial increase in scope and would have significant operational issues especially for intermediaries operating in financial centers such as Luxembourg, London or Dublin.
- If no tax benefit exists in a non-Member State but is
present in another jurisdiction will this be reportable?
This seems likely that it will be applied and it would require transactions whereby there's no tax benefit to still be reviewed. This could require US and APAC entities to complete reviews where there's any EU link through an intermediary.
- What are the practical activities where there are multiple
intermediaries in a transaction?
The obligation will fall to all intermediaries to ensure the transaction is correctly reported, however there's an exemption where it can be evidenced that one intermediary has filed and the other parties rely on that reporting. This requires reliance being placed on third parties where there are no contractual protections, and for risk reduction many intermediaries may choose to complete the review and reporting regardless. Although, perhaps the biggest controversies are destined to occur when multiple professional advisors are involved – what happens when they don't agree?
The deadline for implementation is still a year away so on paper there's still plenty of time. But, because of the retrospective reporting requirements, these rules catch arrangements which have occurred since 18 June and this two year period of course brings a range of operational issues.
Common questions asked include:
- How do I know if a transaction I undertake now will be reportable or not?
- How do I ensure I am gathering enough information?
- Should I complete reviews based on the EU legislation or wait until local implementation
For those impacted by this game changing regulation it's clear that there are still a lot of unknowns. However, cliché as it may be, preparation here is key and there are many activities that can be adopted now that will save some challenges later. Simple steps such as:
- Adopting a prudent interpretation of the legislation and determining which transactions could be impacted
- Ensuring you collect and store all data items that may be required. Some hard lessons were learnt with FATCA/CRS and the similar retrospective requirement. Don't assume data can be easily sourced or that clients can be contacted two years on!
- Align with other intermediaries and share approaches. This can save a lot of difficulties down the line
Although this implementation will certainly be challenging for many, the financial industry will continue to embrace this push for greater transparency and, due to the necessity of collaboration between intermediaries, this legislation in particular will be beneficial to the financial community.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.