Reportable cross-border arrangements (DAC6)

Building on earlier initiatives and directives aimed at creating an environment for fair and transparent taxation, the European Union (EU) has expanded the scope of its Directive on Administrative Co-operation. With the introduction of Council Directive 2018/822 effective 25 May 2018, the EU creates mandatory disclosure rules for intermediaries and taxpayers with respect to potentially aggressive cross-border tax planning arrangements. This new reporting obligation is expected to play a critical role in the relationship of (tax) advisors and their clients.

1. Generic hallmarks linked to the main benefit test
   1. The taxpayer or a participant in the arrangement undertakes to comply with a condition of confidentiality which may require them not to disclose how the arrangement could secure a tax advantage vis-à-vis other intermediaries or the tax authorities.
   2. The intermediary is entitled to receive a fee that is fixed by reference to the tax advantage.
   3. Use of substantially standardised documentation and/or structures made available to different taxpayers without a need to be substantially customised for implementation.
2. Specific hallmarks linked to the main benefit test
   1. A participant in the arrangement takes contrived steps which consist in acquiring a loss-making company, discontinuing the main activity of such company, and using its losses in order to reduce its tax liability.
   2. Converting income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax.
   3. Circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features.
      
      
3. Specific hallmarks related to cross-border transactions
   1. Deductible cross-border payments made between two or more associated enterprises where at least one of the following conditions occurs:
      1. The recipient is not resident for tax purposes in any tax jurisdiction
      2. Although the recipient is resident for tax purposes in a jurisdiction, that jurisdiction either:
         1. Does not impose any corporate tax or imposes corporate tax at the rate of zero or almost zero; or
         2. Is included in a list of third-country jurisdictions which have been assessed by member states collectively or within the framework of the OECD as being non-co-operative.
      3. The payment benefits from a full exemption from tax in the jurisdiction where the recipient is resident for tax purposes.
      4. The payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes.
   2. Deductions for the same depreciation on the asset are claimed in more than one jurisdiction.
   3. Relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction.
   4. Transfers of assets where there is a material difference in the amount being treated as payable in consideration for the assets in those jurisdictions involved.
      
      
4. Specific hallmarks concerning automatic exchange of information and beneficial ownership
   1. Undermining the reporting obligation under the laws implementing EU legislation or any equivalent agreements on the automatic exchange of financial account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements.
   2. Non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures:
      1. That do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
      2. That are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures; and
      3. Where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.
         
         
5. Specific hallmarks concerning transfer pricing
   1. Use of unilateral safe harbor rules.
   2. Transfer of hard-to-value intangibles.
   3. Intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 % of the projected annual EBIT of such transferor or transferors if the transfer had not been made.

Please note that the above are the minimum requirements as defined by the Directive. Individual member states can decide to implement more stringent rules such as including additional hallmarks or expanding the scope to also include domestic arrangements. For more information, please consult the country specific information.

Who has to report? 

Intermediaries 

The primary reporting obligation lies with the intermediaries (eg accountants, tax consultants, lawyers, banks, etc).

Active intermediary: Any person that is involved in the design, marketing, organisation, making available for implementation or management of the implementation of reportable cross-border arrangements.

Passive intermediary: Any person that has provided aid, assistance or advice, either directly or by means of other persons, and could be reasonably expected to know that they have undertaken assistance or advice with respect to a reportable cross-border arrangement.

Each intermediary has the obligation to report and may only be exempted from disclosing if there is proof, in accordance with national law, that another intermediary has already reported the arrangement.  An intermediary who can invoke professional privilege under the national law, is required to notify, without delay, any other intermediary of its reporting obligation. If there is no such intermediary, the reporting obligation lies with the relevant taxpayer.

In the event that an intermediary has a reporting obligation in multiple member states the Directive foresees a set of tie breaker rules to determine where the arrangement must be reported.

Relevant tax payer 

If there are no intermediaries involved or in case the intermediary is prevented from reporting due to a professional privilege, the relevant tax payer himself is responsible for reporting the arrangement with the competent authorities.

In the latter case, the intermediary should notify the taxpayer of his professional privilege.

In the event that a relevant taxpayer has a reporting obligation in multiple member states the directive foresees a set of tie breaker rules to determine where the arrangement must be reported.

Reporting deadlines

Any intermediary that has knowledge, possession or control of information on reportable cross-border arrangements must report that information with the competent authorities within 30 days beginning:

1. On the day after the reportable cross-border arrangement is made available for implementation; or
2. On the day after the reportable cross-border arrangement is ready for implementation; or
3. When the first step in the implementation of the reportable cross-border arrangement has been made; or for passive intermediaries
4. On the day after they provided, directly or by means of other persons, aid, assistance or advice,

whichever occurs first.

In the case of marketable arrangements, the intermediary is required to file a periodic report every 3 months.

The same deadlines apply for when the reporting obligation lies with the relevant tax payer.

What needs to be reported?

The following information needs to be reported:

1. The identification of intermediaries and relevant taxpayers, including their name, date and place of birth (in the case of an individual), residence for tax purposes, tax identification number and, where appropriate, the persons that are associated enterprises to the relevant taxpayer
2. Details of the hallmarks that make the cross-border arrangement reportable
3. A summary of the content of the reportable cross-border arrangement, including a reference to the name by which it is commonly known, if any, and a description in abstract terms of the relevant business activities or arrangements, without leading to the disclosure of a commercial, industrial or professional secret or of a commercial process, or of information the disclosure of which would be contrary to public policy
4. The date on which the first step in implementing the reportable cross-border arrangement has been made or will be made
5. Details of the national provisions that form the basis of the reportable cross-border arrangement
6. The value of the reportable cross-border arrangement
7. The identification of the member state of the relevant taxpayer(s) and any other member states which are likely to be concerned by the reportable cross-border arrangement
8. The identification of any other person in a member state likely to be affected by the reportable cross-border arrangement, indicating to which member states such person is linked.

When does DAC6 become applicable?

DAC6 officially enters into force on 1July 2020 but will already apply to arrangements as of 25 June 2018.  Historical information, being reportable arrangements with respect to the period from 25 June 2018 to 30 June 2020, is reportable by 31 August 2020 at the latest.

In view of the COVID-19 pandemic, the European Commission has submitted a proposal for a three-month extension, which defers the reporting deadline to 31 October 2020 for the reportable arrangements related to the period 1 July 2020 to 30 September 2020.  Depending on the evolution of COVID-19 measures, another three-month extension could be possible.

Baker Tilly member firms can work with you to ensure compliance with this new reporting obligation. Please contact your local team for the latest status and information on DAC6.