More Transparency in the EU: Questions & Answers on DAC 6; Are you up to date on cross-border arrangements?

• Date: 01 November 2020
• Author: Hill, James

The European Union (EU) passed a sixth version of its Directive on Administrative Cooperation in the Field of Taxation, known as DAC 6 (EU Council Directive 2018/822), on May 25, 2018. DAC 6 introduces reporting requirements for professional intermediaries (and, under certain circumstances, taxpayers) relating to their involvement in a wide range of cross-border arrangements and transactions featuring "hallmarks" of tax planning that concern one or more EU member states or the United Kingdom. DAC 6 refers to these as "reportable cross-border arrangements." Because the law's effect is limited to cross-border arrangements involving member states and the United Kingdom, its scope excludes wholly domestic matters. Failure to comply with DAC 6 could lead to significant penalties under the domestic legislations of the EU member states as well as reputational risks. This applies not only to intermediaries (law firms, accounting firms, banks, etc.) but also, in some circumstances, to taxpayers.

Why Has DAC 6 Been Introduced?

The new rules aim to provide member states' and the United Kingdom's tax authorities with information on arrangements made and structures used that may reduce or eliminate tax liability. The information reported to national tax authorities will be shared automatically among the tax authorities (and to some extent with the EU). Information shared will be used to coordinate tax policy to address what is perceived to be unacceptable tax planning and reduce the erosion of national tax bases and the shifting of taxable profits into lower-tax regimes. As discussed below, reportable arrangements under DAC 6 are widely drafted--and will catch some transactions that most tax professionals would not previously have thought of as "unacceptable" tax planning.

When Did It Take Effect?

DAC 6 came into force on July 1, 2020, for reportable arrangements. However, as a result of COVID-19, on June 24, 2020, the Council of the EU adopted an amendment allowing EU member states to defer the time limits for filing and exchanging reportable arrangements by up to six months. Many member states (but not all) and the United Kingdom have deferred the initial reporting dates. In the United Kingdom, France, and Belgium, for example, the first reports will be due by January 31, 2021, in relation to reportable arrangements made available or where the first step took place between July 1, 2020, and December 31, 2020. For all later arrangements, there is a thirty-day reporting deadline. Germany chose not to defer the initial reporting dates, so the first reports were due by August 1, 2020 (with regard to reportable arrangements where the first step occurred on July 1, 2020).

Is There a Retroactive Element?

One practical difficulty of DAC 6 is its retroactivity. Even though it came into force only recently, on July 1, 2020, any reportable cross-border arrangement whose first step was implemented between June 25, 2018, and June 30, 2020, inclusive, must also be reported. In the United Kingdom, France, and Belgium, such arrangements must be reported by February 29, 2021, which is an extended deadline. In Germany, such arrangements had to be reported by August 31, 2020. This retroactivity means that intermediaries and taxpayers involved should (if they have not already) conduct exercises to identify and report on relevant matters initiated in that period.

Given Brexit, Why Is the UK Involved?

Under its transitional agreement with the EU, the United Kingdom is treated for most purposes as if it were still an EU member state until December 31, 2020. Therefore, the United Kingdom has still had to implement DAC 6 and has done so. Intermediaries subject to UK jurisdiction will therefore continue to be subject to the reporting requirements. In any event, many jurisdictions around the world are looking at DAC 6 and are considering introducing similar reporting regimes. An example is Mexico, where mandatory disclosure rules are being introduced starting from January 1, 2021.

Who Needs to Report?

Primarily, DAC 6 is aimed at what it calls intermediaries, and it is those intermediaries who must report in the first instance. An...