Revenue Releases Guidance Notes on DAC6 implementation
On Friday 3rd July, the Irish Revenue released guidance on the EU Mandatory Disclosure rules under Council Directive (EU) 2018/822 of 25 May 2018 (“DAC6”). DAC6 was introduced into Irish law by Finance Act 2019 which was enacted on 22 December 2019. The guidance released provides further insight into the operation of the rules, which require mandatory disclosure of cross border arrangements where certain hallmarks are met.
Further engagement with the Irish Revenue and key stakeholders is expected in the coming months.
Background to DAC6 and key obligations
Chapter 3A, Part 33 of the Taxes Consolidation Act, 1997 (“TCA”) implements DAC6 into Irish law. The DAC6 Directive was introduced to further the implementation of recommendations made by the OECD BEPS Action 12 paper on Mandatory Disclosure Schemes, building on existing domestic requirements in territories such as the US, Canada, UK and Ireland.
The DAC6 legislation provides for the reporting of cross border arrangements bearing specific hallmarks as outlined in the Directive (“reportable cross border arrangements”, or “RCBAs”). Where an RCBA is implemented or is made available by implementation, a reporting obligation with respect to the arrangement arises. The reporting obligation arises primarily to the intermediary who designs, markets or organises the arrangement or who, having regard to the facts and circumstances, provides aid or assistance with respect to the design, marketing or organisation of the RCBA. Where no such intermediary exists (e.g. in the case of an arrangement managed by an in house tax function) or where legal professional privilege may be exercised (in the case of advice given by a law firm), the reporting obligation falls to the relevant taxpayer.
In line with the Directive, the legislation introduced by Finance Act 2019 provided for a specific set of deadlines with respect to the reporting of RBCAs. In light of the challenges presented by COVID19, communications issued by Revenue have deferred the reporting deadlines by 6 months as follows:
||Revised reporting deadline
|Mainstream reporting of arrangements made available for implementation between 1 July 2020 – 31 December 2020||31 January 2021*|
|Lookback reporting period with respect to RCBA implemented between 25 June 2018 – 30 June 2020||28 February 2021|
*It is expected that the Revenue portal to facilitate the reporting of RCBAs will open on 1 January 2021.
Key features of the guidance – Key definitions
Central to understanding and applying the DAC6 rules in Irish law is the concept of what qualifies as an “arrangement”. The term is given a wide definition in legislation, and such a broad interpretation is mirrored in Revenue guidance issued. The term includes all types of arrangements, transactions, payments, schemes and structures and may also include verbal agreements. Importantly, the guidance clarifies that the terms includes a series of arrangements, and that one arrangement could conceivably refer to the advance of a loan, interest payments under same and the ultimate repayment of loan principal. Guidance issued therefore suggests that where a loan is advanced prior to 25 June 2018, interest payments under same may not be reportable as and when they arise. Applying the same analysis to a loan agreement entered into post 25 June 2018, the guidance would suggest that where a reporting obligation arises, it should refer to the first step of same and should not necessitate separate reporting for each interest payment and on repayment of the principal.
Where an RCBA is reported to Revenue, an “Arrangement ID” number will be supplied with respect to that arrangement.
II. Cross border arrangement
To come within the definition of a cross border arrangement, at least one of the participants to the arrangement must have a nexus to an EU Member State and at least one other participant must have a nexus to another EU Member State or a third country. The concept of what a participant is has not been expanded on in legislation, but Revenue’s guidance outlines instead that a participant is a person who plays an active role in the arrangement. However, a person does not need to play a “major” role in order to be treated as a participant.
III. Main Benefit Test
The hallmarks under Category A, Category B and points (b)(i), (c) and (d) of paragraph 1 of Category C (please refer to Annex IV of the Directive for full hallmarks here) will be taken into account for the purpose of determining whether an arrangement comes within the reporting obligation where they meet the “main benefit test”. The main benefit test will be satisfied where it can be established that a tax advantage was the main benefit or one of the main benefits which a person may reasonably expect to derive from the arrangement. In this regard, the main benefit test is an objective one having regard to the relevant facts and circumstances.
The guidance issued with respect to the main benefit test highlights existing guidance in the form of Tax and Duty Manual Part 33 – 01 - 01 which may be of assistance in assessing whether such a test has been met in the context of the hallmark in question.
The guidance identifies two separate categories of intermediary, namely:
1. The person who designs, markets, organises or makes available for implementation an RCBA; and
2. The person who could be reasonably expected to know that such person has undertaken to provide aid or assistance with respect to the designing, marketing, organising or management of the implementation of an RCBA.
The latter category is acknowledged in guidance as being potentially wider reaching and may include accountants, auditors, wealth managers and others. The guidance however specifies that in order for a person to fall within the definition of an intermediary, it is necessary for them to have “some degree of involvement in the arrangement”. Therefore, “routine” services are unlikely to result in the service provider being classified as an intermediary. Discussions and correspondence with Revenue on this matter would suggest that auditors who become aware of a potentially reportable cross border arrangement after the fact should not be classified as an intermediary. However, the level of knowledge and the facts and circumstances of each case must be examined as required.
Key features of the guidance – Hallmarks
i. Hallmark Category A – Generic hallmarks linked to the main benefit test
The guidance on Hallmark Category A makes it clear that in order for a cross border arrangement to trigger a reporting obligation, the existence of this hallmark must coincide with meeting the main benefit test.
Accordingly, the guidance on the Hallmark A1 dealing with conditions of confidentiality explains that the mere existence of a confidentiality clause does not, in of itself, trigger a reporting obligation. Indeed, the guidance refers to non-disclosure type agreements which are used in practice to protect commercial secrets, and such agreements or clauses should not trigger a reporting obligation unless the objective is to prevent disclosure of a tax advantage from other intermediaries or from tax authorities. This should not, however, be read as a blanket carve out for all confidentiality clauses and analysis should be undertaken to identify any related reporting obligations that may arise.
Helpfully, the guidance outlines a range of arrangements that prima facie should not trigger a reporting obligation under the Hallmark dealing with substantially standardised documentation. Such arrangements include certain Profit Sharing Schemes, Salary Sacrifice Agreements and Retirement Benefit Schemes.
ii. Hallmark Category B – Specific hallmarks linked to the main benefit test
The guidance provides further insight into the types of arrangements that may trigger reporting obligations under this hallmark. In particular, the Hallmark dealing with the conversion of income into capital or into a gain to be taxed at a lower rate or treated as exempt may be triggered, for example, in the case of a fund that is a “wrapper” for an investment in an underlying asset, or in the case of stock lending or repo transactions. Whether or not such arrangements are in fact reportable will, again, depend on whether the main benefit test has been met. As with Hallmark Category A, Approved Profit Sharing Schemes are not expected to fall within this category of Hallmark but further analysis should be carried out on a case by case basis.
iii. Hallmark Category C – Specific hallmarks related to cross border transactions
Revenue guidance indicates that hallmarks in this category are aimed at “hybrid arrangements”, and specific reference is made to Part 35C of the Taxes Consolidation Act 1997 which contains the newly introduced Irish anti hybrid provisions.
Further engagement with Revenue is expected on this Hallmark Category in due course. However, initial engagement presently suggests that the Hallmark dealing with a payment to recipient not resident in any jurisdiction should not be read as applying to payments made to jurisdictions with no concept of tax residence. Further clarity on this point is expected. Similarly, it is expected that the Hallmark dealing with seductions for the same depreciation on an asset claimed in more than one jurisdiction should not be triggered where there is a “dual inclusion” of income against which the depreciation is claimed in both jurisdictions. Such an interpretation would likely remove from the scope of reporting a large number of arrangements involving branches and head offices to the extent they have an Irish connection, but as of yet this interpretation has not been formalised in guidance.
iv. Hallmark Category D – Specific hallmarks concerning automatic exchange of information and beneficial ownership
The guidance with respect to this category primarily would be intended to address arrangements designed to circumvent reporting under the Common Reporting Standard (CRS).
v. Hallmark Category E – Specific hallmarks concerning Transfer Pricing
The guidance on this Hallmark Category and in particular the use of unilateral safe harbour rules outlines that the existing Revenue practice of accepting a 5% mark-up of the cost base with respect to low value intra group services is not to be considered a “unilateral safe harbour”.
Practical considerations and compliance issues
The guidance addresses the scope of the reporting obligation in the context of intermediaries and taxpayers and notes that reasonable steps to obtain information should be taken. Regard should be had to the information that is within a person’s knowledge or control; in particular the guidance would appear to regard information within a corporate group as being within the control of the taxpayer, and such individuals will be expected to request information from other group member as required to meet compliance obligations.
A relevant taxpayer who obtains or seeks to obtain a tax advantage from an RCBA is obliged to disclose the arrangement number issued by Revenue in their annual income tax or corporation tax return. The guidance outlines that taxpayers will not be expected to comply with this requirement for returns made in respect of accounting periods ending prior to 1 January 2019 or tax years prior to 2019.
Penalties for non-compliance
Penalties for noncompliance either by the taxpayer or intermediary are set out in legislation. The guidance provides that where a decision is taken as to the report ability of an arrangement but is subsequently found to be incorrect, there will not be a failure to comply if it can be shown that the decision was reached in an objective way and the analysis was carried on based on all available facts. This underscores the need for contemporaneous documentation to be maintained to record any DAC6 analysis and conclusions reached whether carried on by an intermediary or a relevant taxpayer.
Further Considerations and next steps
The Revenue guidance is a welcome addition in understanding and applying the DAC6 rules, given the wide reaching impact for both intermediaries and taxpayers and the high penalties for noncompliance.
While the deferral of the filing obligations is also a welcome development for intermediaries and taxpayers alike, it is important to remember that this merely puts a pause on the filing and does not represent a complete halt in progress that needs to be made. With that in mind, taxpayers and intermediaries should view the six month delay as the perfect opportunity to analyse, develop and fine tune their response to DAC6 requirements both in Ireland and in other Member States.