DAC 6 – New EU tax disclosure rules to challenge advisers and their clients

by Annette Beresford CTA

What is DAC 6?

Essentially, from a UK perspective, this is a new EU obligation which will require UK taxpayers and intermediaries to disclose certain cross-border arrangements to HMRC (which will pass this on to all other EU member states).  DAC 6 refers to EU Council Directive 2018/882/EU which provides for mandatory disclosure rules for intermediaries (and in some cases, taxpayers) in respect of cross-border arrangements exhibiting certain “hallmarks”.  The EU’s aim is to capture information on “potentially aggressive tax planning arrangements” that erode the tax base of EU member states.

Disclosure will be made to domestic tax authorities, which will then provide the information disclosed to all other member states through an automatic exchange of information.

Although the UK is set to leave the EU in 2019, the Government continues to negotiate, implement and apply EU legislation until exit negotiations have been concluded. The Finance Bill 2018-19 contains enabling legislation allowing the Treasury to enact regulations to implement DAC 6 (which HMRC have confirmed will occur by 31 December 2019).  It should also be noted that DAC 6 is based on an OECD initiative that the UK would be expected to implement in any event.

The challenge of retroactive effect

The first disclosures under DAC 6 will not be due until August 2020.  However, such disclosures will be required to cover any relevant arrangements where the first step was taken after 25 June 2018 (being the date on which DAC 6 entered into force).  This poses the challenge that intermediaries and taxpayers have to consider now how to track relevant arrangements in order to be able to meet disclosure requirements in two years’ time – without the benefit of knowing how DAC 6 will be implemented in the UK and what exactly will be disclosable.

The government will consult on the implementing legislation in 2019, which should give affected businesses and representative bodies an opportunity to comment and raise concerns. The gathering of potentially disclosable information will need to start now however.

What types of cross-border arrangements will be disclosable?

The rules apply to “cross-border arrangements” which affect two EU member states or an EU member state and a third country. A cross-border arrangement will be disclosable under DAC 6 if it meets one or more of a number of specified hallmarks.

Some of the hallmarks will only apply where an arrangement meets the “main benefit test” where it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.  Other hallmarks apply whether or not the “main benefit test” is met and thus could potentially catch bona fide commercial arrangements which are not motivated by tax avoidance.

The hallmarks are broadly as follows:

• Generic arrangements linked to the “main benefit test” of obtaining a tax advantage which fall within certain specified categories. For example, this includes arrangements where an adviser is entitled to receive a fee based on the amount of the tax advantage derived from the tax scheme;
• Specific hallmarks linked to the “main benefit test” of obtaining a tax advantage, e.g. an arrangement that has the effect of converting income into capital, gifts or other categories of revenue which are taxed at a lower level or are exempt from tax.
• Specific hallmarks relating to cross-border transactions between related parties. For example, a cross-border arrangement where tax deductions are claimed in more than one jurisdiction in respect of the same item of expenditure would fall within this category.
• Any scheme designed to circumvent EU legislation or agreements on automatic exchange of information, such as certain types of arrangements involving a non-transparent legal or beneficial ownership chain.
• Schemes not conforming to the arm’s-length principle or the OECD’s transfer pricing guidelines.

The rules are intentionally very broad and may require disclosure of a wide range of arrangements.  There is some concern as to how DAC 6 may affect Brexit planning arrangements.

Who is an intermediary?

“Intermediary” is broadly defined as “any person that “designs, markets, organises, manages or makes available for implementation a cross-border arrangement” and also includes any person that knows (or could be reasonably expected to know) they have provided, directly or indirectly “aid, assistance or advice” in relation to a reportable cross-border arrangement.

While it is clear that a firm of lawyers or accounts can be an intermediary, the position of an in-house legal team is currently less clear (unlike the UK’s domestic disclosure rules known as DOTAS, the DAC 6 rules do not include an exemption for in-house advisers).

Who will need to file the disclosure report?

The disclosure obligation is on intermediaries in the first instance. Where disclosure by an intermediary would be in breach of legal professional privilege under the national law of a member state and there is no other intermediary, the relevant taxpayer is required file the report. Who is entitled to rely, and the extent to which they can rely, on legal professional privilege, and whether privilege can be waived, varies between EEA jurisdictions.

Intermediaries subject to legal professional privilege will be required to notify any other intermediary or (if there is none) the relevant taxpayer of their disclosure obligations without delay.

Where there is more than one intermediary involved in the same cross-border arrangement, all of the intermediaries may be required to make a disclosure, unless an intermediary has proof that that same information has already been filed by another intermediary. Clearly, this could result in tax authorities being swamped with information.

What information will need to be included in the report?

The information required to be disclosed and shared with other member states under DAC 6 is comprehensive and includes the following:

• identification of the intermediaries and relevant taxpayers, including their names, dates and place of birth (in case of an individual), residence for tax purposes, taxpayer identification numbers and, where appropriate, persons that are associated enterprises of the relevant taxpayer;
• details of the hallmarks that make the cross-border arrangement reportable;
• a summary of the arrangement, including a reference to the name by which it is commonly known (if any) and a general description of the relevant business activities or arrangements, without leading to the disclosure of business secrets or processes that would be contrary to public policy;
• the date the first step in implementing the arrangement was or will be made;
• the value of the arrangement;
• identification of the member state of the relevant taxpayer(s) and any other member states that are likely to be concerned by the arrangement, as well as any other person likely to be affected by the arrangement.

Of course, an intermediary will only be able to disclose information that is within their knowledge, possession and control.

When will the reports have to be filed?

Member states must transpose the Directive into their national laws and regulations by 31 December 2019.

In addition, member states must require intermediaries and taxpayers to file information on reportable cross-border arrangements the first step of which was implemented between the twentieth day following the date of its publication in the Official Journal of the EU (which is 25 June 2018) and 1 July 2020 (the date of application of the Directive).

Intermediaries and relevant taxpayers, as appropriate, will be required to file information on those reportable cross-border arrangements by 31 August 2020.

After that first reporting date, arrangements falling within the scope of DAC 6 will need to be reported within 30 days after the relevant arrangement is made available for implementation, is ready for implementation or the first step in the implementation has taken place.