Global | Publication | December 2018
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. The legislation aims to combat aggressive tax planning and improve tax transparency in the EU.
Although not yet implemented at the national level, the disclosure obligations need to be treated as “live” since they provide for implementation with retrospective effect from June 25, 2018.
DAC 6 imposes mandatory reporting of “reportable cross-border arrangements” affecting at least one EU Member State to their home tax authority. The home tax authority will then automatically exchange the reported information with tax authorities in other Member States.
Although its stated objectives are to target aggressive tax planning and to improve visibility for tax authorities on such activities, the deliberately wide drafting of the Directive means that it can potentially apply to certain standard transactions which may not have any particular tax motive. Ordinary transactions, including certain types of insurance and reinsurance structures, may be considered reportable cross-border arrangements. This is because the transaction is with a party in a “low-tax jurisdiction”. There is no safe harbor for arrangements having a legitimate underlying commercial purpose.
The reporting obligations fall on “intermediaries”, or in certain circumstances, the taxpayer itself. The reportable cross-border arrangements must fall within one of a number of “hallmarks”: broad categories setting out particular characteristics identified as potentially indicative of aggressive tax planning.
The scope of the Directive is very wide and the detail is left to local implementing law and guidance.
Although the first notification will be due in August 2020, 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 will need to work out how they will respond before they are given any guidance or detail by the local implementing authorities. This will be particularly challenging in the context of the wide scope of the Directive.
Anyone who designs, markets, organizes, or makes available or implements a reportable arrangement or anyone who helps with reportable activities and knows or could reasonably be expected to know that they are doing so would be considered an “intermediary” under the Directive.
The scope of the definition is broad, and could include consultants, accountants, financial advisers, lawyers (including in-house counsel), holding companies and insurance intermediaries.
A single transaction will involve multiple intermediaries. Take for example a reinsurance transaction. The potential intermediaries involved would include lawyers (including in-house counsel), underwriters, capital providers, insurance brokers, accountants and financial advisers. There is no carve-out for non-tax people, and there is no exclusion from the reporting obligations for in-house advisers.
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.
To fall within the disclosure rules, the intermediary must have some connection to the EU. This is established by
The DAC 6 reporting requirements apply to “reportable cross-border arrangements”. An arrangement will be “cross-border” if it concerns a Member State and either another Member State or a third country. The connection with the jurisdiction is clearly established by the presence of tax resident entities or of branches but the carrying on of an activity which does not give rise to a permanent establishment is also within scope.
This does not necessarily require a cross-border transaction to take place. A domestic transaction which has tax implications for another EU Member State will fall within scope. Purely domestic arrangements which do not impact tax in another jurisdiction are not the target of this regime.
Arrangements are reportable if they fall within any of five “hallmarks”, broad categories setting out characteristics identified as potentially indicative of aggressive tax planning. These are widely drawn and there is as yet little guidance on whether many standard commercial transactions and structures will be considered reportable.
A number of the hallmarks apply only if the “main benefit” threshold is met, i.e. where one of the main benefits expected from an arrangement is a tax advantage. The UK guidance in respect of a similar test under the domestic reporting regime is relatively low, with “a main benefit” being any benefit that is “not incidental”. Accordingly, if the tax outcome is of significance in the way that an insurance or reinsurance arrangement is structured, disclosure would be the default course of action.
Category C hallmarks apply broadly by reference to features which may well be present in ordinary commercial transactions not driven by tax motives. These hallmarks pick up, for example cross-border payments or transfers between associated enterprises where the recipient is in a low, no tax or blacklisted jurisdiction or where the receipt is tax exempt. Transfers to blacklisted countries do not need to meet to the “main benefit” test but the application of the test will need to be considered on a case by case basis in all other cases.
Other hallmarks are designed to identify marketed tax avoidance schemes and technical features typically seen in tax avoidance planning and also look at arrangements which undermine tax reporting or transparency or involve features identified as high risk for transfer pricing.
There is no de minimis threshold for reportable arrangements. Although domestic implementing legislation may confine the scope of the potentially reportable arrangements, there has as yet been little indication of what this might entail and given the reciprocal nature of information exchange regimes attempts to do so may be challenged.
The “when”, “what”, “who” and “where” of reporting.
Once the Directive is implemented, reports need to be filed within 30 days of the earlier of
The information to be reported is listed in the Directive and includes
Reports need to be filed by the intermediary. Where there is no intermediary or the intermediary is subject to legal professional privilege, the report must be made by the taxpayer. Where there are multiple intermediaries, showing that another intermediary has reported the arrangement can exempt an intermediary from his reporting obligations.
The Directive sets out a hierarchy to determine the Member State in which disclosures should be made. This is determined, in descending order by
Failure to report can result in penalties being imposed by the relevant Member State. In the UK, HMRC has indicated that penalties will be aligned with those under the UK’s Disclosure of Tax Avoidance Schemes (DOTAS) regime which allow for a maximum penalty of £1 million.
If you would like any further information on the challenges presented by DAC 6 or to discuss how these could be implemented in your business please contact your usual Norton Rose Fulbright advisers or one of the contacts listed below.
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The US Supreme Court has ruled that a “pure omission” under Item 303 of Securities and Exchange Commission Regulation S–K cannot give rise to a private action for securities fraud under Section 10(b) and Rule 10b-5(b) of the Securities Exchange Act of 1934.
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