Understanding DAC 6
EU tax directive 2018/822 and its effects on cross-border tax arrangement
- What is the purpose of DAC 6
- What are DAC 6 hallmarks and main benefit tests?
- Who would have to report?
- What must be reported, and when?
What is the purpose of DAC 6 ?
Council Directive (EU) 2018/822 amending Directive 2011/16/EU (“DAC 6”) as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements, provides for mandatory disclosure of cross-border arrangements by intermediaries or taxpayers to the tax authorities and mandates automatic exchange of this information among the EU Member States. The stated purpose of DAC 6 is to enhance transparency, reduce uncertainty over beneficial ownership and dissuade intermediaries from designing, marketing and implementing harmful tax structures.
As Luxembourg followed closely the wording of DAC 6, although its entry into force is scheduled for 1 July 2020, transactions with one or more hallmark(s) indicated in the Directive and put in place after 25 June 2018 will have to be reported to Luxembourg Tax Authorities. It is therefore important to anticipate and establish processes to permit the identification of transactions falling within the scope of this new obligation in order to facilitate their subsequent reporting.
What are DAC 6 hallmarks and the main benefit test?
A hallmark is a characteristic or feature of a cross-border arrangement entailing its mandatory reporting if met. The five hallmark categories have been transposed into the Luxembourg draft law, which is closely following the Directive.
A main benefit test (MBT) would apply to generic hallmarks as well as several specific hallmarks. As per DAC 6, the MBT verifies if the main benefit, or one of the main benefits, having regard to all relevant facts and circumstances, that a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
The MBT compares the value of the expected tax advantage with any other benefits likely to be obtained from the transaction and has the advantage of requiring an objective assessment of the tax benefits.
The draft law also clarifies that the MBT must be met with respect to direct taxes. It would not apply where the tax advantage would be solely linked to VAT, customs duties, compulsory social security contributions or other taxes, whether the advantage was obtained in an EU or a non-EU country.
Who would have to report?
The reporting obligation would fall on intermediaries but also, in some specific cases, on relevant taxpayers. The commentary to the draft law explains that intermediaries would notably include accountants, tax and financial advisors, banks and consultants. The commentary also indicates that DAC 6 does not in itself impose on the intermediaries and taxpayers any specific duty beyond their existing professional obligations. For many intermediaries and some taxpayers, current professional obligations cover Anti-Money Laundering requirements.
In principle, where there would be more than one intermediary involved in the same reportable cross-border arrangement, the obligation to file information would lie with all the intermediaries simultaneously. The draft law would also foresee the sequence to be followed where there would be more than one taxpayer. Where no intermediary located in the European Union is involved, the reporting obligation would fall on the relevant taxpayer.
What must be reported, and when?
The mandatory reporting to the tax authorities would be required from 1 July 2020: any reportable cross-border arrangement implemented after that date is to be reported within 30 days of the reporting trigger. As a transitional rule, intermediaries and relevant taxpayers would also be required to disclose information on reportable cross-border arrangements, the first step of which was implemented between 25 June 2018 and 1 July 2020. This information would have to be filed by 31 August 2020.
It is therefore important to anticipate and set up processes to allow the identification of transactions falling within the scope of this new obligation in order to facilitate their subsequent reporting.
The proposed penalty, in line with those already applicable in the context of exchange of information, would amount to up to EUR 250,000. A penalty would apply for failure to report, late reporting, incomplete or inaccurate reporting, as well as a breach of the information duty imposed on lawyers to timely notify other intermediaries or relevant taxpayers.
As indicated in the commentary to the draft law, the intentional nature of an infraction would be taken into account when defining the amount of the penalty.
Even though the draft law provides some interpretative comments, more clarity on its key concepts, as well as some practical implementation guidelines would be welcomed. In any event, businesses should already start to identify transactions potentially affected by DAC 6, as the first reporting should be filed during summer 2020.
The draft law will now be debated in the Luxembourg parliament, opined upon by the professional chambers and the Council of State, and possibly amended. A final vote is expected by the end of the year.
In order to properly apply the rules, there are certain steps that intermediaries/ taxpayers (as the case may be) should be planning for now:
- Strategy: Mobilising your business’ response to the requirements, discussing policy and raising awareness at board level and establishing a plan for efficient compliance.
- Impact assessment: Identifying transactions or structures potentially affected by the hallmarks and considering where reporting responsibility will reside.
- Technology: Selecting a solution for capturing arrangements that aligns with local requirements, and integrates with reporting.
- Training: Raising awareness within the business through e-Learning modules as well as bespoke training programmes.
- Monitoring: Tracking regulatory changes to make the relevant source information accessible to affected intermediaries and taxpayers.