Understanding DAC6: the EU Directive on cross-border tax arrangements
DAC6 is the sixth EU Directive on administrative cooperation which aims for more transparency and fairness in tax by targeting aggressive tax arrangements, even if they are legal.
DAC6 applies to cross-border tax arrangements, which meets one or more specified characteristics and which affects at least one EU country. It imposes mandatory reporting obligations for these tax arrangements, no matter whether the arrangement is justified according to nation law. The directive was published on 25 June 2018 and the first reporting deadline is 31 August 2020.
Failure to comply could mean facing significant sanctions under local law in EU countries and reputation risks for businesses, individuals and intermediaries.
The UK decided to make some initial amendments to the regulations, mainly for clarification purposes. HMRC are yet to publish the UK online reporting service as it is currently consulting on the technology required. Different countries have chosen different dates for when the Directive comes into force. The UK has elected for 1 July 2020.
A cross-border arrangement is reportable if one or more hallmarks (a characteristic that indicates a potential risk of tax avoidance), apply to the arrangement. The hallmarks are grouped into 5 categories (A to E). The main benefit test must be satisfied for any arrangement within categories A and B, and subcategories of C. The main benefit test is subjective and one of the main benefits is to obtain a tax advantage.
- Category A: conditions of confidentiality, remuneration related to a tax advantage and standardised documentation
- Category B: loss buying, income into capital and circular transactions
- Category C: deductible cross border payments, depreciation, relief from double taxation and transfer of assets
- Category D: undermining reporting obligations and obscuring beneficial ownership
- Category E: unilateral safe harbours, hard to value intangibles and cross border transfers
The primary disclosure requirement lies with the intermediary, who ‘designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement’ or ‘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’ of such activities. This includes, but is not limited to tax advisors, lawyers, trust officers, consultants and bankers.
An intermediary must make a report to HMRC if it meets any of the following conditions
- It is resident for tax purposes in the UK;
- It has a permanent establishment in the UK, through which it provides the services in respect of the arrangement;
- It is incorporated in the UK, or governed by the laws of the UK; or
- It is registered with a professional association relating to legal, taxation or consultancy services in the UK.
To be reportable by an intermediary, information must be in its knowledge, possession or control. An intermediary may be exempt from its reporting requirements if it can show that another intermediary has reported the arrangement. An intermediary unable to report due to domestic legal professional privilege rules is instead required to inform other intermediaries of their reporting obligations. Where there is no other intermediary, the report must be made by the taxpayer.
The directive was published on 25 June 2018, so intermediaries have to monitor and collect information about cross-border arrangements from that date and report it when DAC6 comes into force on 1 July 2020. The directive provides an initial one-off reporting deadline of 31 August 2020, from then onwards a 30-day rolling window for reporting new arrangements will apply.
Failure to comply could mean facing significant sanctions under local law in EU countries and reputational risks for businesses, individuals and intermediaries.
The amount of penalties that may become payable varies significantly, from a few hundred Euros to €4.9m (maximum penalty in Poland) and imprisonment of up to 8 years.
Although the UK is limited by legal obligations to implement the directive, HMRC has made a number of changes, including amending the penalty regime to ensure it is proportionate and is flexible enough to deter non-compliance, while not unduly penalising those who make genuine mistakes. The default position will be a one-off penalty of up to £5,000, with daily penalties only applying in more serious cases, and subject to the determination of the First-Tier Tribunal (FTT).