Understanding the EU Directive on Cross-Border Tax Arrangements (“DAC6” or “EU MDR”)

The EU Council Directive 2011/16 about cross-border tax arrangements known as DAC 6 has been in effect since 25 June 2018. DAC6 introduces an obligation on companies and reporting intermediaries to disclose potentially aggressive cross-border tax planning arrangements and on Tax Authorities to exchange all information with their counterparties. DAC6 mirrors many of the concepts and principles of the domestic mandatory disclosure reporting requirements introduced by the Finance Act 2010. The deadline for reporting to Revenue is 31 August 2020.

DAC 6 applies to cross-border tax arrangements which meet one or more specified characteristics (hallmarks) and concern either more than one EU country or an EU country and a non-EU country. It mandates a reporting obligation for these tax arrangements no matter whether the provision is justified according to national law.

The purpose of DAC6 is to strengthen tax transparency and prevent aggressive cross-border tax planning by providing tax authorities with information about potentially aggressive tax planning schemes. Member States can then assess whether those schemes facilitate tax avoidance and take any steps necessary, including amending legislation, to close off the scheme.

Failure to comply with DAC 6 could mean facing significant sanctions under local law in EU countries and reputational risks for businesses, individuals and intermediaries. As such, it is essential that companies understand the importance and implications of the directive and the need to act now to ensure compliance by the deadline in 2020.

What is within the scope of DAC?

DAC6 imposes mandatory reporting requirements on EU-based tax advisors, accountants, lawyers, banks, financial advisors and other intermediaries who design, market, organise, make available for implementation or manage the implementation of potentially aggressive cross-border tax-planning arrangements or schemes.

It also covers persons who provide aid, assistance or advice about potentially aggressive cross-border tax-planning schemes, where they can be reasonably expected to know that they have performed that function. If the intermediary is located outside the EU or is bound by legal professional privilege, the obligation to report passes to the taxpayer.

In general, the disclosure requirements concern cross-border arrangements that have specific characteristics, known as "hallmarks”, which indicate that the main purpose or one of the primary purposes of the arrangement is to obtain a tax advantage. Other “hallmarks”, which will be reportable, do not require this main benefit test to be satisfied.

Intermediaries will be required to report any reportable cross-border arrangements to their tax authorities. The Member State to whom the arrangements are reported must then automatically share this information with all other Member States.

What is a Cross-Border Arrangement?

DAC6 defines a “cross-border arrangement” as an arrangement 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: -

  1. not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
  2. one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
  3. 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;
  4. 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
  5. such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

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.’

It must also be noted that the term person includes a company who provides such advice.

What may not be within scope?

DAC6 is aimed at obtaining information in respect of cross-border arrangements and not specifically aimed at regular ‘vanilla’ services outlined below. While Revenue are yet to circulate guidelines specifically relating to the implementation of DAC6, it is widely expected that the following services will not be included within the scope: -

  1. Filing Annual Tax Returns;
  2. Preparation of capital tax returns;
  3. Tax Provisioning reviews of financial statements;
  4. Analysing a client entitlement to claim capital allowances;
  5. Research and Development Tax Credit in respect of past expenditure; or
  6. Accounting advice.

However, Intermediaries, as defined, should always consider whether they have been ‘involved in the management or implementation of a reportable arrangement’ when fulfilling any of the above engagements.

When does DAC6 take effect?

Under DAC6, the first reportable transactions are those where the first implementation step occurred between 25 June 2018 (the date of entry into force of the Directive) and 1 July 2020 (the date of application of the Directive). All information relevant to this period will be required to be reported to the Irish Revenue Commissioners by 31 August 2020.

Therefore, even though Member States have until 31 December 2019 to adopt and publish national laws required to comply with DAC6, the scope of the Directive needs to be considered with effect from 25 June 2018.

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 beginning on the day after the arrangement: -

  1. was made available for implementation;
  2. was made ready for implementation; or
  3. 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 provided such aid, assistance or advice.

Next steps

All taxpayers need to ensure they have proper procedures in place for capturing all cross-border arrangements that meet the definition set out in DAC6. It is important 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 important that all staff are adequately trained to ensure that they are aware of the directive and the implications.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below: -

Staff Member

Position

Email

Telephone

Cormac Kelleher

International Tax Partner

ckelleher@mazars.ie

01 449 4456

Claire Healy

International Tax Director

chealy@mazars.ie

01 449 6477

 

December 2019

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