The European Union passed a sixth version of its Directive on Administrative Cooperation in the Field of Taxation, known as “DAC 6” (Directive (EU) 2018/82 2), on 25 May 2018. DAC 6 introduces reporting requirements for professional intermediaries (and under certain circumstances tax payers) relating to their involvement in a wide range of cross-border arrangements and transactions featuring “hallmarks” of tax planning concerning one or more EU Member States or the UK. These are referred to in DAC 6 as “reportable cross-border arrangements“. Specific hallmarks relate to transfer pricing (category E) and they do apply without main benefit test.
Failure to comply with DAC 6 could imply significant penalties under domestic legislations of the EU member states (and the UK) as well as reputational risks for not only intermediaries ( law firms, accounting firms , banks …) but also for businesses and individuals.
Reportable cross-border arrangements in the Transfer Pricing area are the following:
- Arrangements that involve the use of transfer pricing safe harbours. e.g. a safe harbour under which a taxpayer can report a different rate of interest under an intragroup loan than local transfer pricing rules would otherwise permit.
- Arrangements that involve the cross-border transfer of hard-to-value intangibles between associated enterprises such as group companies. Intangibles being hard-to-value where (broadly speaking) the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible, are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer.
- Intragroup transfer of functions, risks or assets resulting in significant profit shift. This covers business restructuring as described under Chapter 9 of the TPG and is specifically to be watched during these crisis times and related forced or voluntary business reorganizations.
The new rules are aimed at providing Member States' (and the UK's) tax authorities with information on what arrangements are being made, and structures being used, that may reduce or eliminate tax liability. The information reported to national tax authorities will be shared automatically among the tax authorities (and to some extent with the European Commission).
The professional intermediaries subject to those reporting requirements are obviously lawyers and accountants, but it could also catch banks, consultants and other advisers. It is not a requirement that tax advice has been provided, so it is potentially very broad. However the intermediary must have an EU taxable presence or be registered with an EU legal, tax or consultancy services professional body to be within the scope of DAC 6.
There may be circumstances where obligations apply to “relevant taxpayers”. This may be where there is no intermediary at all (in-house arrangement), or where there is no intermediary with the relevant EU connection, or where the only intermediary (or intermediaries) are covered by legal professional privilege.
DAC 6 came into force on 1 July 2020 for reportable arrangements. However, as a result of the COVID-19 impact, on 24 June 2020, the Council of the European Union adopted an amendment allowing EU Member States an option to defer by up to six months the time limits for the filing and exchange of the reportable arrangements. Many Member States (but not all) and the UK have deferred the initial reporting dates. In the UK and Belgium for example, the first reports will be due by 31 January 2021 in relation to reportable arrangements made available or where the first step took place between 1 July 2020 and 31 December 2020. For all later arrangements, there is a 30 day reporting deadline.
One of the practical difficulties with DAC 6 is its retroactivity. Even though it only came into force on 1 July 2020, any reportable cross-border arrangement the first step of which was implemented between 25 June 2018 and 30 June 2020 inclusive must also be reported. In the UK and Belgium, such arrangements must be reported by 28 February 2021 (extended deadline). This retroactivity means that intermediaries and taxpayers involved should (if they have not already) conduct exercises to identify and report on relevant matters initiated in that period.
DAC 6 must also be considered on a going forward basis for any new transactions/arrangements. It is also advisable to ensure consistency with country by country reporting (BEPS 13).
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