Transparency is high on the global agenda for governments looking to counter tax avoidance. Recent years have seen the introduction of a number of tax transparency and antiavoidance measures across the EU, several in direct response to the OECD’s final BEPS (Base Erosion and Profit Shifting) reports and the Panama Papers revelations. Taxpayers and their advisers are needing to devote an increasing amount of time and resource to compliance and the provision of information to tax authorities.
The adoption of the Common Reporting Standard (CRS) introduced the automatic exchange of tax and financial information on a global level. It was a game-changer, allowing for the exchange of account holder information and introducing a new level of transparency.
Now, responding to Action 12 of the OECD’s BEPS project, the transparency agenda is looking at cross-border arrangements and the disclosure of actual transactions undertaken. This concerns not just transactions that are tax-motivated but also ordinary transactions that may have a “potential tax effect” but are not driven by tax planning motives.
The proposals for the amendment of Council Directive 2011/16/EU on administrative cooperation in the field of taxation (commonly referred to as DAC 6) originally announced by the European Commission in June 2017, are now in force.
Although not yet implemented at national level, the disclosure obligations need to be treated as “live” as they provide for implementation with retrospective effect from June 25, 2018.
DAC 6: disclosure requirements for taxpayers and intermediaries
DAC 6 imposes mandatory reporting of cross-border arrangements affecting at least one EU Member State that fall within one of a number of “hallmarks”: broad categories setting out particular characteristics identified as potentially indicative of aggressive tax planning. The reporting obligations fall on “intermediaries” or, in some circumstances, the taxpayer itself. The information reported will be contributed to a central directory accessible by the competent authorities of the Member States.
|It might be thought that this is about aggressive tax planning, but the way the Directive has been drafted means that it potentially also applies to standard transactions with no particular tax motive. This means that ordinary transactions such as cross-border leasing, securitisation structures, certain types of reinsurance and many standard group corporate funding structures may be reportable. There is no safe harbour for arrangements having an underlying commercial purpose.
The scope of the Directive is very wide and the detail is left to local implementing law and guidance. The Directive states that it does not go beyond what is necessary to discourage the use of aggressive cross-border arrangements and does not therefore offend the basic EU principle of proportionality. Given how broadly drafted it is, this is a bold statement. The implementing jurisdictions transposing the Directive will need to determine what compliant provisions look like and exactly how far the domestic legislation needs to go to achieve the stated objectives.
The first notifications will be due in August 2020 but the Directive provides that notifications should be made in respect of arrangements dating back to June 25, 2018. Notwithstanding Brexit, it is anticipated that the UK will implement the Directive. Those potentially within scope therefore need to work out how they will respond before they have any guidance or detail.
There are three key concepts underpinning the new regime
- Reportable cross-border transactions
Examples of common structures that are potentially reportable
Reinsurance transactions with low tax jurisdictions
Arrangements involving cross-border payments and transfers (including to third party reinsurers) may require disclosure under Category C hallmarks.
Cross-border leasing transactions
- Arrangements under which depreciation is claimed in relation to the same asset in different jurisdictions come under the Category C hallmark, whether or not giving rise to any tax benefit.
- Cross-border payments to low tax jurisdictions would also need consideration.
- Category D hallmarks pick up arrangements involving entities without substantive economic activity or substance (whether or not tax motivated).
Arrangements involving cross-border payments and transfers may require disclosure under Category C hallmarks.