The first exchange of information between EU Member States for the DAC6 mandatory tax disclosure regime looks set to go ahead on 30 April 2021. In this blog post we look at why, if you have not already done so, it’s time to seriously consider implementing internal processes to identify potential DAC6 exposures and coordinate the filing of reportable arrangements within the 30-day window.
What is DAC6?
DAC6 is an initiative of the EU to detect potentially aggressive tax planning arrangements by introducing an additional level of transparency. It takes the form of EU Council Directive 2018/822, which amends the existing EU rules to introduce the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.
The DAC6 is a new mandatory disclosure regime for EU advisors and taxpayers. The principal goal is to give tax authorities an early warning mechanism for potentially ‘tax aggressive’ schemes set up for the purpose of avoiding taxes. DAC6 has potentially far-reaching consequences for both individuals and organisations, including those in Switzerland and Liechtenstein.
Cross-border arrangements fulfilling at least one of the hallmark characteristics defined in the DAC6 as being potentially tax aggressive may be subject to reporting under DAC6. Even though arrangements that had a first step of implementation in the so-called interim period (between 25 June 2018 and 30 June 2020) should have been disclosed by 31 August 2020, the COVID-19 pandemic prompted most EU Member States to extend the initial reporting deadline until 28 February 2021.
Changing timelines and interpretations
The pandemic has upset the DAC6 schedule somewhat. Given that COVID-19 has prompted 25 of the EU Member States to defer initial DAC6 reporting deadlines, in most cases to 31 January and 28 February this year, this extended period for reporting allowed tax authorities, intermediaries and taxpayers additional time to prepare and execute DAC6 related tasks.
EU Member States’ efforts to navigate the DAC6 landscape amid this uncertainty are leading to differences in the way the rules are implemented and interpreted across different Member States. Even though some countries have released guidelines, there’s still a lack of clarity on the way key requirements with regard to specific hallmarks and concepts are interpreted in certain jurisdictions.
No reason to wait
Despite all the obstacles and difficulties, the EU Member States will exchange of information on reportable cross-border arrangements between EU tax authorities on 30 April 2021.
This means it’s time for multinational enterprises to seriously consider implementing internal processes to identify potential DAC6 exposures and coordinate the filing of reportable arrangements.
What are the practical implications of implementation?
All EU Member States other than Cyprus have built the DAC6 requirements into their own legislation. Going forward, any arrangements reportable under DAC6 must be disclosed to the relevant tax authorities not later than 30 days after the arrangement is made available for implementation, becomes ready for implementation, or the first step is implemented(whichever of these occurs first).
DAC6 is a new and unfamiliar type or regulation that has faced considerable challenges in the implementation phase. A particular source of uncertainty is divergence in the criteria concerning interpretation guidelines, which many EU countries haven’t yet published, and the status of implementation from state to state.
Given these differences, advisors and taxpayers need to be especially vigilant when it comes to checking arrangements for compliance with DAC6. A good example is the interpretation of Hallmark E3 (‘Intragroup cross-border transfer of functions and/or risks and/or assets'), where the context of holding or finance entities isn’t yet defined consistently across Member States.
Another complicating factor is Brexit. Even though the UK originally implemented the DAC6 Directive, in light of its departure from the EU it subsequently removed the disclosure obligation, unless the cross-border arrangement relates to so-called Category D Hallmarks – including situations where Common Reporting Standard (“CRS”) reporting obligations are circumvented or when the beneficial owner of a non-transparent legal or beneficial ownership chain is made unidentifiable.
What’s next with DAC6?
The tax authorities of EU Member States are committed to ensuring implementation of the Directive in line with the EU’s requirements to ensure exchange of reportable information by the 30 April 2021 deadline.
It’s not clear how tax authorities will respond once they gain access to this information. What is clear is that any failure to comply with the requirements could lead to taxpayers or the EU intermediaries advising them being subject to penalties as well as increased interest from tax authorities in the EU MS.
Given the imminent exchange of information, it’s a good time for multinational companies to think about putting internal processes, controls, and mechanisms in place to identify and meet their DAC6 obligations. To avoid penalties for failing to file or filing late, they need to implement a rapid, coordinated response to any DAC6 exposures (in line with the 30-day disclosure requirement). They should not focus too narrowly on the tax department only: actions by other departments such as finance, treasury, legal and human resources could also be subject to DAC6 reporting requirements.