DAC6: New mandatory disclosure regime for Intermediaries and their clients
The Directive (EU) 2018/822, also called DAC6, represents the 6th modification of the Directive 2011/16/EU on Administrative Cooperation (DAC). It introduces various amendments as to expand the provisions of DAC. DAC6 imposes the obligation to report cross-border arrangements which include characteristics indicative of aggressive tax planning on European Union Member States.
Who has the obligation to report
Since 1 January 2021, a Cross-border Arrangement which involves one or more EU Member States and meets at least one DAC6 Hallmark as laid out below, qualifies as a Reportable Cross-Border Arrangement (''RCBA''). For every such arrangement, parties qualifying as ‘’Intermediaries’’ with respect to the RCBA or the EU taxapayers affected by it, must report it. However, in case where there are no intermediaries which can report or the intermediaries are exempted of their obligation as explained below, the obligation of reporting burdens the taxpayers.
An Intermediary is:
A promoter - any person that designs, markets, organises, or makes available for implementation or manages the implementation of a reportable cross-border arrangement; or
A service provider - any person that, having regard to the relevant facts and circumstances and based on available information and the relevant expertise and understanding required to provide such services, knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement.
In order for someone to be an intermediary, he/she shall meet at least one of the following additional conditions:
(a) be resident for tax purposes in a Member State;
(b) have a permanent establishment in a Member State through which the services with respect to the arrangement are provided;
(c) be incorporated in, or governed by the laws of, a Member State; and
(d) be registered with a professional association related to legal, taxation or consultancy services in a Member State.
Intermediaries falling within the scope of the Directive can be for instance tax advisors, lawyers, accountants and fiduciaries.
A Taxpayer is any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement.
Legal Profession Privilege (LLP)
Intermediaries operating under legal professional privilege (LLP), are exempted from the obligation to report where such reporting information could be classified to fall within the scope of ‘’legal professional privilege’’.
Which arrangements should be reported:
The arrangements which fall within the scope of the DAC6 are those:
which are cross-border arrangements; and
those which implicate one or more ‘Hallmarks’ specified in Annex IV of the Directive.
Cross-border arrangement as defined by the Directive is an arrangement which involves either more than one Member State or a Member State and a third country where at least one of the following conditions is met:
(a) not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
(b) one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
(c) one or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment;
(d) one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
(e) such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
A Hallmark is defined as a characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance. The Hallmarks are divided into five categories. The Hallmarks of category A,B and the points 1(b)(i), (c) and (d) of the category C are subject to the main benefit test (''MBT''), and the Hallmarks of category D and E are those which by themselves trigger a reporting obligation without being subject to the MBT. In other words, a cross-border arrangement to be reportable under the DAC6, it must fall within on of the categories and when it falls within the Categories A, B or 1(b),(c),(d) of Category C it also requires the Main Benefit Test to be fulfil (explained below).
The five categories of Hallmarks are as follows:
Category A: Generic Hallmarks Linked to Main Benefit Test
Category B: Specific Hallmarks Linked to Main Benefit Test
Category C: Specific Hallmarks Related to Cross-Border Transactions
Category D: Specific Hallmarks Concerning the Automatic Exchange of Information and Beneficial Ownership
Category E: Specific Hallmarks Concerning Transfer Pricing
Main Benefit Test (MBT)
In order for the MBT to be satisfied, it must 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.”
‘’Tax advantage”, includes:
(i) Relief or increased relief from tax
(ii) Repayment or increased repayment of tax
(iii) Avoidance or reduction of a charge to tax or an assessment to tax
(iv) Deferral of a payment of tax or advancement of a repayment of tax
(v) Avoidance of an obligation to withhold tax
Identification and Arrangement information
The following identification information of all parties to the RCBA has to be reported:
Registered, residential addresses
Role of each party in the arrangement
Jurisdiction of tax residence
TIN numbers of all parties included in the disclosure: intermediary, taxpayer, associated enterprise, other affected persons
Deadlines and the retrospective reporting
The report to the local competent authority must be filled withing 30 days of the arrangement or structure being made available for implementation. The 30 days begin to count: (a) on the day after the reportable cross-border arrangement is made available for implementation; or (b) on the day after the reportable cross-border arrangement is ready for implementation; or (c) when the first step in the implementation of the reportable cross-border arrangement has been made, whichever occurs first.
On the 21st of September 2021, the Cypriot Tax Department announced a further extension to 30 November 2021 of the non-application of administrative fines for submissions with respect to the information on reportable cross-border arrangements under the European Union (EU) Directive on the mandatory disclosure and exchange of information. The reporting is retrospective and hence, anything that is reportable under DAC6 from the 25th of June 2018 up until today, should be reported on the 30th of November 2021.
Penalties for non-compliance vary in accordance to the infringement, but the maximum amount per arrangement should not be exceeding €20,000.
Fails to report an arrangement to the Cypriot tax authorities, an administrative fine between €10,000 and €20,000 is expected to apply.
Delay in reporting of up to 90-calendar days, an administrative fine between €1,000 and €5,000 is expected to apply.
Delay in reporting exceeds 90-calendar days, an administrative fine between €5,000 and €20,000.
Where an intermediary is exempted from reporting due to LPP obligations and such intermediary fails to notify other intermediaries or the relevant taxpayer about the exemption from filing to assume their reporting obligations, an administrative fine between €10,000 and €20,000 is expected to apply. In the case of a delay in the above notification, an administrative fine between €1,000 and €5,000, which, if such delay exceeds 90-calendar days, will range between €5,000 and €20,000.
In the case of incomplete or misleading reporting of an arrangement by an intermediary or relevant taxpayer, an administrative fine between €1,000 and €10,000 is expected to apply.
Where an intermediary or relevant taxpayer fails to provide the Cypriot tax authorities with information or documents for an arrangement within 14 days from the date of the notice of the tax authorities, an administrative fine between €1,000 and €10,000 is expected to apply.
In the case of a failure to pay the administrative fines imposed or of the continuance of the relevant breach, the Cypriot tax authorities can further increase the administrative fine imposed, which cannot exceed €20,000.
How can MPC help?
Our team combines experts in legal, tax, data and technology. By bringing together these different skill sets, we can help clients to understand DAC6 and the broader tax policy context, as well as implement effective controls and processes to ensure all reportable cross-border arrangements are proactively identified and managed.
To discuss the implications of DAC6 on your business or any of the above in more detail please, contact us.