DAC 6 imposes mandatory reporting of cross-border arrangements affecting at least one EU member state where the
arrangements fall within one of a number of “hallmarks”. The use of broad categories designed to encompass particular
characteristics viewed as indicative of aggressive tax planning follows the approach taken by the UK in implementing its DOTAS
regime back in 2004. The hallmarks under DAC 6 are much broader, however, and more parties are likely to find themselves
being classed as “intermediaries”, on whom the reporting obligation falls, than is the case with those classed as “promoter” under
the DOTAS regime. The potential application of DAC 6 to standard transactions with no particular tax motive creates a difficult
Difficulties have been compounded by the implementation timeline, which provides for implementation with retrospective effect,
meaning that the disclosure obligations were “live” from June 25, 2018, before any implementing legislation or guidance had
Reporting was intially expected to start in Summer 2020 but, responding to the challenges presented by the COVID-19 pandemic,
the EU introduced an optional six-month delay to reporting deadlines. The UK (and all member states other than Germany, Austria
and Finland) implemented this deferral.
The UK implemented DAC 6 via the International Tax
Enforcement (Disclosable Arrangements) Regulations in
January 2020 with effect from July 1, 2020. The Regulations
largely imported the drafting and definitions of the Directive so
did not provide much additional clarity. HMRC published final
guidance at the start of Summer 2020 and it is this guidance
that provides some helpful steers on how HMRC will approach
The cross-border implementation of the regime adds to the
compliance burden as the reporting position may need to
be reviewed in more than one EU jurisdiction to ensure the
domestic rules are aligned. This means that if a conclusion is
reached that reporting is not required in the UK on the basis
of HMRC guidance, it cannot be assumed that the same
conclusion will be reached in other Member States involved;
something which seems contrary to the aim of having an
EU-wide reporting regime.
- HMRC split intermediaries into “promoters” (similar to the
DOTAS concept) and “service providers” (those not directly
involved in structuring or promoting an arrangement).
Service providers only have a reporting obligation if they
know or could reasonably be expected to know that they
are involved in a reportable arrangement. The guidance
provides some reassuring commentary on what will be
deemed to be in the knowledge of an intermediary acting as
a service provider.
- A number of the hallmarks only apply where a “main
benefit” test is met and the guidance provides some
useful clarification of this test. The test is to be applied
objectively, looking at the benefits a person might
reasonably be expected to obtain, rather than actual motives
and objectives. There will be no “tax advantage” if the
consequences of the arrangement are in line with the policy
intent of the legislation the arrangement relies on. On this
basis, HMRC view products such as ISAs and pensions
or claims for R&D relief as not caught unless by reason of
being part of a wider arrangement.
- Many hallmarks are open to extremely broad interpretation
and the guidance provides some helpful examples in areas
such as cross-border transfers and income into capital
conversion. It is unclear how far that guidance can be read
across to arrangements with largely analogous features.
- Whilst HMRC’s interpretation potentially limits the extent
of UK disclosure in several areas, including standardised
products and double depreciation, where other jurisdictions
take a different approach this may, of course, not limit
reporting requirements in practice.
- Reporting will be online and HMRC will allocate an
“arrangement reference number” (ARN) to the reported
arrangement. Relevant taxpayers will then have to include
this ARN in their income or corporation tax return referred
to as making an “annual report”) for each subsequent
period in which they obtain a tax advantage as a result
of the arrangement.
- The default penalty for failure to report is £5,000 but if
HMRC consider this too low (perhaps due to deliberate
or repeated failure), the First-tier tribunal can impose daily
penalties of up to £600 or, if it considers that is too low,
has discretion to impose penalties of up to £1m. Penalties
for failure by a relevant taxpayer to make an annual return
can be up to £5,000 for the first failure within three years,
rising to £10,000 per arrangement for a third or subsequent
- No penalty will be due if there is a “reasonable excuse” for
failure to comply. The guidance stresses the importance
of having “reasonable procedures” in place to ensure
compliance when considering whether a person has a
“reasonable excuse” for a failure and casts some light on
what those procedures might involve. More generally, steps
taken to comply will be taken into account when considering
the level of any penalty even where the “reasonable excuse”
defence is not available.
How far does HMRC’s guidance take us?
It has been clear, since the publication of the Directive in
June 2018, that the DAC 6 reporting obligations would be
far-reaching and that they would impose a significant
compliance burden. What is evident now that DAC 6 has been
implemented by Member States is just how problematic the
cross-border nature of the regime is and that it may give rise to
In a number of areas where concerns had been raised during
formal and informal consultation, such as the reporting of
standardised products, double depreciation of an asset or
cross-border transfers, HMRC are proposing to adopt an
interpretation which seeks to limits the potential extent
of disclosure. HMRC’s guidance also provides reassuring
comments in relation to the extent of an intermediary’s deemed
knowledge of the arrangements.
Unless the approaches taken by tax authorities in respect of
their domestic regimes are aligned, however, this will not affect
whether disclosure is required in another member state. UK resident
intermediaries concluding that there is no reporting
requirement in the UK may well need to consider the rules in
a number of other relevant jurisdictions and make reports in
jurisdictions with which they have more limited involvement,
adding a significant compliance burden.
Where a report needs to be made and exactly what needs
to be reported is far from straightforward. A London branch
of an international bank headquartered in another member
state is likely to need to report London-arranged transactions
in its head office jurisdiction, rather than in the UK. If the
arrangement is not reportable in that jurisdiction because of the
way that jurisdiction has implemented the Directive, the bank
may need to consider the position in the UK (branch location).
The London branch may also be surprised to hear that HMRC
do not consider the fact that an arrangement is compliant with
the Banking Code of Practice as meaning that it is outside DAC
6. The reporting position of branches of entities headquartered
in third states is not consistent across member states. It is a far
from straightforward regime to comply with.
The UK guidance: Who is an intermediary?
Intermediaries have the primary obligation to report. The
draft regulations define “intermediary” by reference to the
Directive. It includes anyone who designs, markets, organises
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.
The guidance, consistent with the approach identified back at
consultation, provides some clarification, identifying two “types”
The first, “promoters”, actually design, market, organise or make
available or implement a reportable arrangement. The second,
“service providers”, merely provide assistance or advice in
relation to those activities.
The key distinction is that a service provider will not be an
intermediary if they did not know and could not reasonably have
been expected to know that they were involved in a reportable
arrangement. This provides an important safety net for service
providers involved at the periphery of a transaction. An
example given is of a bank providing finance. This is a welcome
clarification: the bank is not expected to make a disclosure if it
does not have sufficient knowledge of the wider arrangements
and, crucially, whether any hallmark is triggered.
Another welcome clarification is that service providers are
not expected to do significant extra due diligence to establish
whether an arrangement is reportable. The bank, in this
example, should do the “normal” due diligence it would do for
the client and transaction in question. Of course, remaining
willfully ignorant will leave the bank on the wrong side of the
“could reasonably be expected to know” test.
Promoters are assumed to understand how the arrangement
works so there is no similar exclusion available to them.
When is there a tax advantage “main benefit”?
A number of the hallmarks only apply if a threshold “main
benefit” test is met (see the table below). This is met where one
of the main benefits that a person might reasonably expect to
derive from an arrangement is a “tax advantage”. The guidance
is clear that HMRC view this as an objective test: what matters
is whether a tax advantage is the main or one of the main
benefits that the person entering into the arrangement might
reasonably be expected to obtain from the arrangement. That
person’s actual motivation in entering into the arrangement
is not relevant. This “main benefit” concept is used in other
UK regimes and is notoriously difficult to apply. The guidance
(following the same approach as taken in respect of a similar
test under DOTAS) views “main benefit” as picking up any
benefit that is not “incidental” or “insubstantial”, a low threshold.
The key to applying this threshold test lies in HMRC’s
interpretation of “tax advantage” and it’s here that the guidance
provides some helpful commentary, in particular noting that
the there be no “tax advantage” if the tax consequences of the
arrangement are in line with the policy intent of the legislation
upon which the arrangement relies. On this basis, HMRC view
products such as ISAs and pensions, designed and intended
to generate a certain beneficial tax outcome, as not meeting
the test unless by reason of being part of a wider arrangement.
Similarly, the guidance gives the example of R&D relief which it
states would not be caught unless the arrangement attempts to
artificially manufacture entitlement.
“Tax advantage” is defined in the regulations as including:
- Relief or increased relief from tax
- Repayment or increased repayment of tax
- Avoidance or reduction of a charge to tax or an assessment to tax
- Deferral of a payment of tax or advancement of a repayment of tax
- Avoidance of an obligation to withhold or account for tax.
“Tax” for these purposes means any tax to which the Directive
applies (i.e. taxes levied by member states other than VAT,
customs duties, excise duties and compulsory social security
This table summarises the hallmarks and, importantly, distinguishes those to which the “main benefit” threshold applies.
||“main benefit” test?
Commercial characteristics seen in marketed tax avoidance schemes
|Taxpayer or participant under a confidentiality condition in respect of how the arrangements secure a tax advantage.
|Intermediary paid by reference to the amount of tax saved or whether the scheme is effective.
|Standardised documentation and/or structure.
Tax structured arrangements seen in avoidance planning
|Converting income into capital.
|Circular transactions resulting in the round-tripping of funds with no other primary commercial function.
Cross-border payments, transfers broadly drafted to capture innovative planning but which may pick up many ordinary commercial transactions where there is no main tax benefit.
|Deductible cross-border payment between associated persons…
||to a recipient not resident for tax purposes in any jurisdiction.
|to recipient resident in a 0 per cent or near 0 per cent tax jurisdiction.
|to recipient resident in a blacklisted countries.
|which is tax exempt in the recipient’s jurisdiction.
|which benefits from a preferential tax regime in the recipient jurisdiction
|Deductions for depreciation claimed in more than one jurisdiction.
|Double tax relief claimed in more than one jurisdiction in respect of the same income.
|Asset transfer where amount treated as payable is materially different between jurisdictions.
Arrangements which undermine tax reporting under the CRS/transparency.
|Arrangements which have the effect of undermining reporting requirements under agreements for the automatic exchange of information.
|Arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.
Transfer pricing: non-arm’s length or highly uncertain pricing or base erosive transfers.
|Arrangements involving the use of unilateral transfer pricing safe harbour rules.
|Transfers of hard to value intangibles for which no reliable comparables exist where financial projections or assumptions used in valuation are highly uncertain.
|Cross-border transfer of functions/risks/assets projected to result in a more than 50 per cent decrease in EBIT during the next three years.
Key points from the UK guidance
The consultation comments on each category of hallmark.
Category A: the “generic hallmarks”
The “generic hallmarks” (confidentiality, fees based on tax
advantage obtained, use of standardised documentation) are
all subject to the main benefit test. HMRC view the Category
A hallmarks as similar to several hallmarks under DOTAS and
indicated at consultation that they intend to take a similar
approach in interpretation.
Specifically, in respect of standardised documentation, the
guidance notes that under the equivalent DOTAS rules,
arrangements such as ISAs and enterprise investment
schemes are excluded. There is no express exclusion under the
regulations on the basis of HMRC’s view that these kinds of
products are not inherently caught by the main benefit test.
Category B: tax structured arrangements.
Again, these are all subject to the main benefit test. The most
widely discussed of these is Hallmark B2 which captures
arrangements which have the effect of converting income into
capital (or other categories of revenue taxed at a lower rate).
Here the guidance treads a very fine line between situations
where HMRC perceive that a conversion from income to
capital has taken place and those situations where there is a
legitimate commercial choice to be made between different
commercial options. This is an area where further examples
would be welcome although analogies can be drawn. One
example given is of employees given EMI share options as part
of their remuneration where any increase in value in the share
options before exercise could be taxed as a capital gain rather
than income. Whilst the employee could have received salary
income instead, the employer has simply chosen between
viable (normal) commercial options. Other examples pick up
pre-liquidation dividends, company sales where the sale price
includes accumulated earnings, share buybacks and the issue
of securities which qualify as “Excluded Indexed Securities”
under UK law. The addition of steps which are contrived or
outside normal commercial practice would be more likely to
bring the arrangement within the hallmark. A point to note here
is that “conversion” of income into capital does not necessarily
require any pre-existing right to income.
Category C: cross-border payments and double deductions
The guidance provides some useful clarifications in
relation to Hallmark C1 (cross-border payments between
- The “recipient” of a payment will be the person taxable on its
receipt so that, for example, for a partnership, the partners
will be treated as the recipient.
- If the jurisdiction of residence of the recipient of a payment
is not known to the intermediary who is a promoter it is
unlikely to give rise to a reporting obligation. A tax rate is
“almost zero” if it is less than 1 per cent. This applies to
the headline rate of tax, not the effective tax rate a
- For payments to recipients in blacklisted countries where
the first step in the arrangement was taken on or after June
25, 2018, but before July 1, 2020, arrangements will only be
reportable under Hallmark C1(b)(ii) where the jurisdiction
appears on the blacklist both on the date the trigger point
is met and on the date that the reporting obligation arises.
This may be helpful given the addition and removal of the
Cayman Islands from the EU blacklist during 2020. For other
arrangements, the list of blacklisted countries should be
examined on the day on which the reporting trigger point
- When considering whether a payment is tax exempt in
the recipient’s jurisdiction, it is the nature of the payment,
rather than the status of the recipient, that must be exempt:
an exempt body, such as a pension fund will not be
A number of practitioners had questioned whether Hallmark
C2 (requiring disclosure where depreciation is claimed in more
than one jurisdiction) would lead to an absurd result where
assets are acquired by branches, due to the inclusion and
credit basis on which permanent establishments of UK entities
are taxed. HMRC addresses this: arrangements will not be
reportable where there is a corresponding taxation of profits
from the asset in each jurisdiction where depreciation is also
claimed (subject to any double taxation relief). Whilst this is not
strictly in accordance with the drafting of the directive, which
contains no such carve out, this is a welcome approach from
HMRC as it will enable commercially-motivated transactions to
proceed without the risk of being tainted by disclosure.
Category D: transparency
This hallmark looks at arrangements which have the effect of
undermining CRS reporting or obscuring beneficial ownership.
There is no main benefit test and the test is stated to be an
objective one, so that the intention of the taxpayer is irrelevant.
Having said this, the guidance is clear that arrangements which
merely lead to no report under the CRS being made will not be
undermining or circumventing the CRS provided that outcome
is in line with the policy intentions of the CRS (the example
given is using funds held in a bank account to invest in real
estate, a category of investment specifically excluded from
reporting under the CRS). As is often the case, the examples do
not directly address grey areas. Advising a person to transfer
funds to a jurisdiction which has not implemented CRS, in order
to avoid reporting will, not surprisingly, be caught.
Here again the guidance anticipates that “promoters” will
know whether arrangements undermine or circumvent CRS
whereas a “service provider” may not only have knowledge
of a particular step and may not understand the effect of the
arrangement as a whole, so may not be under an obligation
The test at Hallmark D2 (arrangements obscuring beneficial
ownership) is whether beneficial owners can reasonably be
identified by relevant tax authorities, including HMRC. This
does not require a public register of beneficial owners but,
where there is a public register, the hallmark will clearly not
apply. Examples of obscuring beneficial ownership include the
use of undisclosed nominee shareholders or of jurisdictions
where there is no requirement to keep, or mechanism to obtain,
information on beneficial ownership. Helpfully, the consultation
states that, as with the OECD’s Mandatory Disclosure Rules
(MDR), institutional investors or entities wholly owned by one or
more institutional investors are outside this hallmark.
Category E: transfer pricing
Responding to questions raised during informal consultation,
HMRC’s guidance confirms that APAs are not unilateral safe
harbours (but rather agreements as to correct pricing) and are
therefore not caught by this hallmark.
Other comments of interest relate to Hallmark E3 (intragroup
cross-border transfers). This hallmark applies where a
cross-border transfer of functions/risks/assets is projected
to result in a more than 50 per cent decrease in EBIT of the
transferor(s) over the next three years. HMRC’s starting point
is to consider this test at company, rather than group level (as
that is how the UK corporation tax regime works) but there
is acknowledgment that many other jurisdictions have tax
consolidation regimes and may take a different approach.
The test looks at projected earnings, not what has actually
happened: if the projections used in reaching a decision not
to report are what a hypothetical informed observer would
consider reasonable, there is no failure to comply whatever
the real-world outcome. HMRC expect relevant entities to be
producing the kind of projections required to apply this test
and would not expect the taxpayer to need to make any special
calculations for DAC 6. There are a number of grey areas
despite some helpful commentary on what will and will not
constitute “cross-border”. Exactly how this would apply (and
whether it would apply) to a number of common transactions,
including an intra-group hive-up of shares, is unclear.
Reporting – what, who and where
The regulations cross-reference the list of reportable information set out in the Directive and clarify that, to be reportable by an
intermediary, information must be in the intermediary’s “knowledge, possession or control”. The guidance expands on this: an
intermediary is not required to trawl through all of its computer systems to try to find all information held in relation to the relevant
taxpayer in order to see if it might be relevant, but the intermediary will be expected to review the documents and information in
relation to the reportable arrangement.
- Identification of taxpayers and intermediaries, including
- Tax residence
- Name, date and place of birth (if an individual)
- Tax Identification Number (TIN)
- Where appropriate, the associated persons of the relevant taxpayer.
- Details of the relevant applicable hallmark(s).
- A summary of the arrangement, including (in abstract terms) a summary of relevant business activities.
- The date on which the first step in implementation was or will be made.
- Details of the relevant local law.
- The value of the cross-border reportable arrangement.
- Identification of relevant taxpayers or any other person in any Member State likely to be affected by the arrangement.
This is a lot of detail. Whoever is making the report will clearly need to devote time to collating information
Where the report should be made
The Directive sets out a hierarchy to determine which member
state a disclosure should be made in and this hierarchy is
cross-referenced to in the draft regulations. The starting point
is that the report should be made in the member state in which
the intermediary is tax resident, failing which, in the location of
a PE connected with the provision of the relevant services and,
where neither apply, in the place of incorporation or, ultimately,
in the member state where the professional association with
which the intermediary is registered is located.
Disclosure only needs to be made once
A transaction is likely to involve a number of intermediaries.
Disclosure only needs to be made once in respect of
This means that no report needs to be made in the UK if:
- The intermediary has made a report in another EU member state
- Another intermediary has made a report setting out (all) the information that the intermediary would have been required to report.
In either case, the intermediary needs to be able to evidence
that the information that it would have been required to report
has been reported, not simply that a report has been made.
The guidance does not provide suggestions as to how the
intermediary achieves this. The expectation is that the filing
of a report will be evidenced by providing the “arrangement
reference number” provided by HMRC or the relevant
competent authority in other member states but provision of
the ARN does not mean that HMRC accepts that the report is
complete or accurate. Determining whether the report made
was comprehensive may be left to the intermediaries to work
out between themselves. An intermediary who has made a
report and subsequently realises it contains inaccuracies is able
to return to it and make amendments.
Documented formal agreement as to who will make the report
should be in place before the actual reporting obligation
commences. It will be beneficial in transactions where
disclosure is thought to be necessary to ensure that all parties
involved are able to cooperate with the reporting process so
that a single, comprehensive report can be submitted. Parties
involved will want to consider rights of review and comment
and will need to ensure that the making of the report will not
breach any contractual terms, including terms of engagement.
It may become common practice in certain types of transaction
to agree contractually who will undertake the reporting
obligation and in what form.
Legal professional privilege
An intermediary unable to report due to legal professional
privilege is required to inform other intermediaries of the fact
and of their reporting obligations. As would be expected, this
does not provide a blanket exclusion from a requirement to
report: legal professional privilege only applies to information
that is legally privileged. The guidance is clear therefore
that lawyers may need to report any information that is not
privileged in nature. The Law Society has published guidance
which sets out its view on when this might be the case and
situations are clearly very limited. In practice, intermediaries
may agree between themselves that reporting will be
undertaken by an intermediary not subject to legal professional
privilege who can make a single report including all the
required information. No doubt the boundaries of this rule will
be tested over time.
The penalty regime draws on DOTAS and provides for penalties
in a number of areas. The starting point for failure to report
penalties or a failure to notify of reliance on legal privilege is
a default penalty of £5,000 or, if HMRC consider this too low
(perhaps due to deliberate or repeated failure or where the
failure has serious consequences), the First-tier Tribunal can
impose daily penalties of up to £600 or, as under the DOTAS
regime, if the First-tier Tribunal considers this inadequate it
can impose fines of up to £1 million. There are also penalties of
£5,000 (rising to £10,000 per arrangement for repeated failure)
for failure by a relevant taxpayer to make an annual report in
respect of any arrangement in any year in which it obtains
a tax advantage in respect of the arrangement or to make
three-monthly returns in respect of marketable arrangements.
A penalty will not be imposed where a person has a reasonable
excuse for failure to report. In evaluating this, HMRC will
consider whether a person has “reasonable procedures” in
place to ensure that they are able to meet their obligations
under the regime (and has taken reasonable steps to ensure
those procedures are complied with). As is in the case in other
regimes where this defence is available, what is reasonable
will depend on the circumstances and having procedures
in place will not automatically mean that no penalty is due
(repeated failures, for example, may indicate that procedures
are not adequate and steps should have been taken to address
There is acknowledgment of the challenges faced by taxpayers
in the period between June 25, 2018 and the publication of
the Regulations and guidance. Where a failure relates to an
arrangement where the first step of implementation predates
the publication of the final Regulations in January 2020 and
the failure was due to a lack of clarity around the obligations or
interpretation of the rules HMRC anticipate some leniency.