Mandatory Disclosure Rules update 

We no longer live in an anonymous world. Similar to the implementation of country-by-country reporting, Common Reporting Standard (CRS), Foreign Account Tax Compliance Act (FATCA), the introduction of DAC 6 has changed the landscape for all organizations with businesses in the European Union.

The stated objective behind DAC 6 is to provide EU member states with information that enables them to promptly react against harmful tax practices and close loopholes, undertake adequate risk assessments and carry out targeted tax audits where necessary. In essence, the rules seek to increase tax transparency and deter aggressive cross-border tax planning.

The European Union introduced the Mandatory Disclosure Rules/Directive on Administrative Cooperation (DAC 6) in May 2018, pursuant to Action 12 of the Organization for Economic Co-operation and Development’s BEP 
(Base Erosion and Profit Shifting) initiative. DAC 6 requires that EU intermediaries report certain cross-border arrangements to the tax authorities
with which they have a nexus.

While the new rules came into effect on 1 July 2020, the European Commission in June 2020 agreed to provide a six-month optional delay to member states for the implementation of reporting requirements due to the disruptions caused by the COVID-19 pandemic.

All member states—except Austria, Finland and Germany—have implemented the six-month delay. As a result, while in Austria, Finland and Germany reporting under DAC 6 has already started, in other member states the reporting obligations will begin from January 2021.
 

Extended timeline–Optional deferral directive

The rules for reporting reportable arrangements entered into between 1 July 2020 and 31 December 2020 (“Deferral period”) are different compared to the reporting of reportable arrangements entered into between 25 June 2018 and 30 June 2020 (“Historical period”).
 

Historical period

Any reportable arrangements whose implementation was initiated between 25 June 2018 and 30 June 2020 are now reportable by 28 February 2021. In Austria, Finland and Germany, such arrangements were reportable by 31 August 2020.
 

Deferral period

Any reportable arrangements arising between 1 July 2020 and31 December 2020 are now reportable by 31 January 2021. As from 1 January 2021, a 30-day rolling window will apply for all new arrangements.

In Austria, Finland and Germany, arrangements were reportable on a 30-day rolling window as of 1 July 2020.
 

Exchange with tax authorities

Reporting by intermediaries (or relevant taxpayers) to the national tax authorities will be followed by a first cross-border exchange of information between the relevant tax authorities of member states by 30 April 2021.
 

What kind of taxes are covered under the directives?

DAC 6 covers all taxes levied by a member state (or its territorial or administrative subdivision) except value added tax and custom duties, excise duties or any compulsory social security contributions.
 

How do the new obligations of reportable cross-border arrangements work?

As a general rule under the directives, a cross-border arrangement means 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 are met:

a) Not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;

b) One or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;

c) One or more of the participants carries on business in another jurisdiction, through a permanent establishment situated in that jurisdiction, and the arrangement forms part or all of the business of that permanent establishment;

d) One or more of the participants carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment in that jurisdiction;

e) The arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

Reportable cross-border arrangement means any ”cross-border arrangement” that contains at least one of the hallmarks. Hallmarks are characteristics or features (as listed in DAC 6) of a cross-border arrangement that generally presents an indication of a potential risk of tax avoidance. DAC 6 has classified two broad categories of hallmarks:

a) Hallmarks subject to the main benefit test

In this category of hallmarks, an arrangement has to meet
the ”main benefit test” in addition to containing the featured hallmarks in
order to constitute a reportable arrangement. The main benefit test is met once, having regard to all relevant facts and circumstances, the main benefit or one of the main benefits that a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage. Few examples under this test could be:

• Concealing from the relevant tax authority or other intermediaries how said arrangement secures a tax advantage, such as signing a confidentiality agreement, including a non-disclosure agreement; written correspondence with an explicit or implicit obligation not to disclose or share the features of the arrangement; or a verbal or written agreement regarding a confidentiality obligation,
• Deductible cross-border payment between related parties where a payment is made to a zero tax rate jurisdiction, and
• Payment is made to a recipient which is tax exempt.

b) Hallmarks not subject to the main benefit test

It is not required to meet the main benefit test in order
for an arrangement to constitute a reportable arrangement under hallmarks
within this category.

Certain categories of cross-border payments and arrangements that undermine tax reporting/transparency, deductible cross-border payments to blacklisted countries are in scope here. Likewise, arrangements involving the use of unilateral transfer pricing safe harbor rules, deductions for depreciation claimed in more than one jurisdiction, double tax relief claimed in more than one jurisdiction in respect of the same income also fall under this test.
 

Key takeaways for Middle East-based taxpayers participating in EU transactions

Now that the reporting deadline for the majority of EU countries has been extended to early 2021, this is the perfect time for intermediaries/relevant taxpayers with businesses in the EU to think about their DAC 6 compliance management programs.

Businesses should conduct impact assessments to understand the scale of impact that DAC 6 may have on their day-to-day operations and implement the appropriate governance framework and policies and technology solutions in order to ensure compliance with the reporting obligations identified. Businesses should also closely monitor the transposition of DAC 6 by EU member states and assess the impact that exchange of information between the relevant tax authorities may have on their day-to-day activities.

by Abi Man Joshi, Director, Tax, Deloitte Middle East, Marios Fokides, Director, Business Tax, Deloitte Cyprus and Fehar Jallu, Associate Director, Deloitte UK