The legislation applies to cross-border tax arrangements which have specific "hallmarks”. Hallmarks are features which indicate that the primary purpose of the arrangement is to obtain a tax advantage. The transaction will concern either EU jurisdictions or an EU jurisdiction and a non-EU country. The Finance Act provisions mandate a reporting obligation for these tax arrangements, irrespective of whether the provision is justified according to Irish national law.
All Irish taxpayers and intermediaries are required to report cross-border reportable arrangements with effect from 1 July 2020. However, the first report must also retrospectively cover arrangements where the first step was implemented between 25 June 2018 and 30 June 2020.
The Finance Act mirrors the Directive in that it applies to all taxes except Value Added Tax (‘VAT’), customs and excise duties and compulsory social security contributions. The Irish legislation excludes fees on documents issued by public authorities and consideration due under a contract.
What is a Cross-Border Arrangement?
DAC6 defines a “cross-border arrangement” as an agreement concerning either more than one Member State or a Member State and a third country, where at least one of the following conditions is met: -
- not all the participants in the arrangement are resident for tax purposes in the same jurisdiction;
- one or more of the participants in the agreement is simultaneously resident for tax purposes in more than one jurisdiction;
- one or more of the participants carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part of the whole of the business of that permanent establishment;
- 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 other jurisdiction; or
- such a deal has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
The Finance Act definition of reportable cross-border arrangements aligns with the DAC6 definition but does not mirror it. The Act defines an “arrangement” as any of the following:
- a transaction, action, course of action, course of conduct, scheme, plan or proposal; or
- an agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings
- a series of, or combination of, the circumstances referred to at (1) and (2), whether entered into or arranged by one or two or more persons, whether:
- acting in concert;
- entered into or arranged wholly or partly outside the State, or
- entered into or organised as part of a larger arrangement or in conjunction with any other arrangement(s).
Who can be classified as an intermediary?
An intermediary is defined in the Directive as “any person that ‘designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement and includes a person with the requisite knowledge who could reasonably be expected to know that they have undertaken to provide aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement.”
Both the Directive and the Finance Act have a similar definition. The Directive gave Member States the option to exempt intermediaries from the obligation to report where the reporting obligation would breach legal professional privilege (‘LPP’). The Republic of Ireland availed of this exemption. Intermediaries availing of the LPP exemption are however obliged to inform other intermediaries or, if there is no other intermediary, to notify other relevant taxpayers.
Tax advisors, auditors and accountants, who cannot claim LPP, are required to report. If there are no intermediaries who can communicate, the obligation will shift to the taxpayer.
It must also be noted that the term person includes a company who provides such advice.
What is reportable?
The Republic of Ireland has opted to take measures that require each relevant taxpayer to file information about their use of an arrangement with the Irish Revenue for every year they use it, per Article 8ab, Paragraph 11 of the Directive. Irish Revenue will assign a unique reference number to the reportable arrangement, and the taxpayer is required to include that reference number in its annual tax return for each year in which it uses that arrangement.
If the return is made by an intermediary, the intermediary is required to provide the reference number, in writing and within five working days, to all other intermediaries and relevant taxpayers involved in the agreement. If the return is made by a taxpayer and there is more than one relevant taxpayer involved, the first relevant taxpayer is required to provide the reference number, in writing within five working days, to each such other relevant taxpayer.
Intermediaries must specify, when first reporting an arrangement, if it is a “marketable arrangement” as defined in the Finance Act. Information regarding the identity of each intermediary and relevant taxpayer involved, dates of implementation, and Member States included or likely to be impacted, must be reported to the Irish Revenue every three months.
Arrangements are reportable if they fall within one of a number of “hallmarks”: broad categories setting out particular characteristics identified as potentially indicative of aggressive tax planning.
The hallmarks are widely drawn and leave a lot of room for debate as to whether many “ordinary” transactions and structures will be reportable in addition to planning that indicates, in the Commission’s words, “potentially aggressive tax planning”. The Irish Revenue Commissioners are yet to publish their guidance notes in this area but are expected to do so in quarter one.
Many of the hallmarks only apply if a threshold “main benefit” test is met. This is met where one of the main benefits expected from an arrangement is a tax advantage. As explained by the EU, these hallmarks are:
- Category A - Generic hallmarks linked to the main benefit test: arrangements that give rise to performance fees or involve mass-marketed schemes;
- Category B - Specific hallmarks linked to the main benefit test: this includes certain tax planning features, such as buying a loss-making company to exploit its losses in order to reduce tax liability or arrangements aimed at converting income into capital in order to obtain a tax benefit;
- Category C - Specific hallmarks related to cross-border transactions with some of these hallmarks also being subject to the main benefit test: for example, deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax. Another hallmark is about deductions for the same depreciation on an asset claimed in more than one jurisdiction.
- Category D - Specific hallmarks concerning the automatic exchange of information and beneficial ownership: an arrangement is reportable if it has the effect of undermining the rules, or the absence thereof, on beneficial ownership or Directive 2014/107/EU which implemented the CRS or any other equivalent agreement on automatic exchange of financial account information, and;
- Category E - Specific hallmarks concerning transfer pricing: these include the use of unilateral safe harbours; the transfer of hard-to-value intangible assets when no reliable comparables exist and the projection of future cash flows or income are highly uncertain.
Appendix 1 has set out the Hallmarks in more detail and noting where the Main benefit test applies.
When does DAC6 take effect?
Per the Directive, reporting will begin from 1 July 2020 and exchanges between jurisdictions from 31 October 2020. The first report will retroactively cover any arrangements where the first step was implemented between 25 June 2018 and 1 July 2020. Such arrangements will be required to be reported by 31 August 2020. The proposed Irish reporting deadlines are aligned with those in the Directive.
With effect from 1 July 2020, a reportable arrangement must be reported by an intermediary (or the taxpayer if the cross-border arrangement was devised by in-house teams) within 30 days of the arrangement being:
i. made available for implementation;
ii. made ready for implementation; or
iii. when the first step in the implementation was undertaken, whichever occurs first.
DAC6 will also require intermediaries who provided aid, assistance or advice to file the information with the authorities within 30 days beginning on the day after they offered such aid, support or advice.
Irish legislation contains specific penalties for breaches.
Taxpayers need to ensure they have proper procedures in place for capturing all cross-border arrangements. It is essential that all details concerning arrangements which may be caught within the rules with effect from 25 June 2018 are recorded, for potential disclosure in August 2020.
Furthermore, it is vital all staff are adequately trained to ensure that they are aware of the Directive and the implications. While the legislation aims to be as clear and concise as possible, further guidance addressing aspects of the Directive and their application is expected to be published by Irish Revenue.
If you have any questions about the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below: -
This article first appeared in Tax.point Journal February 2020.