1. What is DAC6?
DAC6 or the Directive of Administrative Cooperation Directive 2018/822/EU is an iteration of the European Union (EU) legislative directive aimed at creating a framework for cooperation among the EU member states to combat tax fraud, evasion, and avoidance by establishing a framework for mandatory disclosure of potentially aggressive tax planning structures, schemes, or transactions (reportable arrangements).
- Previous iterations of the Directive of Administrative Cooperation introduced the Common Reporting Standard (CRS) providing the basis for exchange on financial account information, mandated the exchange of cross-border tax rulings and advance pricing agreements issued by EU member states, implemented country-by-country reporting requirements, and provided the tax authorities of EU member states with access to Anti-Money Laundering information.
A structure, scheme, or transaction may be reportable under DAC6 even if it is permissible under law.
2. What are the objectives of DAC6?
- To assist the tax authorities of EU member states in identifying and closing loopholes in existing legislation to prevent tax avoidance.
- Provide supervision and enforce the tax laws of EU member states.
- Dissuade taxpayers and their advisors from using aggressive tax planning structures.
3. What is required under DAC6?
DAC6 will require “Intermediaries” and/or “Taxpayers” with a nexus to an EU member state to identify and disclose cross-border (arrangements between at least one EU member state and another and in some instances, where provided for under local law, between an EU member state and a non-EU country) tax arrangements that fall within a set of “hallmarks” which the DAC6 sets out.
- In drafting the hallmarks, the European Commission identified certain characters of structures, schemes, and transactions that are commonly used to avoid or evade tax.
- A list of the hallmarks is included as an appendix to this document.
As an EU Directive each EU member state needs to draft its own implementing legislation. The Directive provides the minimum standard for reporting obligations, but EU member states can increase the scope of taxes and types of arrangements subject to reporting. For example, Poland and Portugal extended reporting to domestic arrangements.
In certain instances where a structure, scheme, or transaction has characteristics that define a particular hallmark it is only reportable if, in addition to those characteristics, the intention of entering into the arrangement was primarily motivated in obtaining a tax advantage.
- A participant would not have entered into the transaction but for obtaining a tax advantage (or one of the primary drivers of entering into the transaction was to obtain a tax advantage). This is the “Main Benefit Test.”
- The Directive does not define tax advantage, but it is widely accepted, that a tax advantage is obtained where a reasonable person could objectively view the taxpayer’s expectation is to obtain a tax benefit not intended under the law.
- For example, the policy around Individual Savings Accounts in the United Kingdom (UK) intends for the investor to obtain a tax benefit and therefore would not be considered a tax advantage for purposes of DAC6.
- Conversely, where a taxpayer intentionally avoids a tax liability by applying provisions of law that do not expressly intend for the avoidance of that tax liability this would result in a tax advantage.
Who is considered an Intermediary or Taxpayer under DAC6?
Under DAC6 there are two types of Intermediaries.
- Primary Intermediary (Promoter): Any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement, such as law and advisory firms.
- Secondary Intermediary (Service Provider): Any person who provides aid, assistance or advice where: they know or could reasonably be expected to know the arrangement is reportable under DAC6 based on all relevant facts and circumstances, information, and relevant expertise.
DAC6 intends for the reporting obligation to primarily reside with the Intermediary.
The Taxpayer is the individual or entity with a nexus to the European Union who engage in reportable arrangements.
- The Taxpayer must report where an Intermediary cannot report a transaction.
- In some instances, where a Taxpayer engages in a reportable arrangement it may need to additionally submit an annual or periodic return to its local tax authority indicating its participation in a reportable arrangement through the provision of a reference number.
When does DAC6 go into effect?
July 1, 2020. Under the Directive’s original timelines, if a reportable arrangement was identified on July 1, 2020, the first report would be due to the EU member state tax authority by July 31, 2020. Further, DAC6 reportable arrangements in effect from June 25, 2018 through July 1, 2020 would be reported on August 31, 2020.
Will DAC6 reporting be delayed due to COVID-19?
The European Council amended the Directive to provide EU member states with the option to apply a six-month deferral to DAC6 reporting obligations.
Under the optional deferral, the new timeline would begin reporting of the 30-day reporting period (for reportable arrangements identified between July 1, 2020 and onward) on January 1, 2021.
Reporting on arrangements in effect from June 25, 2018 through July 1, 2020 would be reportable on February 28, 2021.
EU member states are not obligated to adopt this deferral and if no affirmative action is taken the original timeline described above apply.
- Finland and Germany will not allow the deferral and the original timelines apply.
- Austria is providing a two-month reporting deferral with the first reports due by October 31, 2020.
- It is unclear how the deferral would work in practice in Poland.
Belgium, Croatia, Cyprus, Czech Republic, Denmark, Estonia, France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Romania, Slovenia, Spain, Sweden, and the United Kingdom have all announced their intention to adopt the deferral and are in the process of implementing legislation.
What needs to be reported under DAC6?
Where a reporting obligation arises the following information, at a minimum, must be reported:
- All involved Intermediaries and Taxpayers, including the name(s), tax residence(s), tax identification number(s), associated enterprises, and for individuals date(s) and place(s) of birth.
- The arrangement and the hallmark(s) representing potential risk of tax avoidance or evasion, including an implementation timeline and the value of the arrangement.
- All EU member states concerned and the applicable tax law the cross-border arrangement is subject.
- Identification of all other persons affected by the cross-border arrangement.
BBH assists in my reporting for purposes of Automatic Exchange of Information (Foreign Account Tax Compliance Act (FATCA) and/or the Common Reporting Standard (CRS)), how will DAC6 impact BBH’s service offering?
Under BBH’s existing FATCA/CRS service offering BBH utilizes a proprietary software that reviews data relating to an account holder including the account holder’s stated tax residency. As part of the FATCA/CRS service offering, BBH references the account holder’s status against Anti-Money Laundering/Know Your Customer documentation for any discrepancies. Where discrepancies are identified BBH works with our clients to understand the nature of the discrepancies and where required facilitate FATCA and/or CRS reporting.
Where BBH identifies a pattern of behavior or documentation discrepancy that causes potential concerns that a client’s investors are using schemes to elude reporting under CRS or conceal the true beneficial owner BBH will inform its clients of the identified behavior or documentation discrepancy. In most instances, BBH will lack detailed knowledge regarding the investor’s relationship with our clients; however, in the unlikely event where BBH (with nexus to the EU) has knowledge that a client’s investor has used a scheme to avoid CRS reporting or obscure a beneficial owner, BBH will file a DAC6 report and notify the impacted client within the Directive’s proscribed timelines.
Our client publicly announced or communicated to someone at BBH that the primary motivation for entering into a particular transaction was in obtaining a tax advantage or tax benefit is the transaction reportable by BBH?
Where an arrangement is structured with the primary intention to obtain a tax advantage and BBH has specific knowledge that obtaining a tax advantage is a main benefit of the arrangement, then as an intermediary with knowledge it may have a reporting obligation.
In such instance, BBH would undertake an analysis to confirm whether one of the DAC6 hallmarks applies and if so if it has a reporting obligation by determining if the arrangement has been reported by another party.
How will DAC6 impact you?
If you have a nexus to the EU and you participate in an arrangement where one or more of the DAC6 hallmarks apply, you may have a reporting obligation as either an Intermediary and/or a Taxpayer. If you think you may have DAC6 obligations, you should work with a tax advisor to understand the impact of DAC6 to your organization.
What happens if you have a DAC6 reporting obligation and you fail to report?
Failure to comply with reporting and/or notification requirements under DAC6 can result in significant penalties. Each EU member state has set out the penalties that can apply. Some jurisdictions may apply criminal sanctions and/or personal liability in addition to civil penalties.
How is BBH approaching DAC6?
BBH is taking compliance with DAC6 seriously and implemented a comprehensive firmwide program that addresses DAC6. BBH has a presence in Ireland, Luxembourg, Poland, and the United Kingdom (UK). To ensure BBH complies with its legislative obligations, BBH is monitoring legislative developments and working with a Big 4 advisory firm to undertake to document and understand our reporting obligations (if any).
In addition, BBH is embedding DAC6 into its existing governance structure to ensure continued compliance.
Participation in Industry Groups to Shape Local Legislation and Guidance – BBH is an active member in a number of industry bodies, providing comments to individual EU member state consultations to assist in shaping the legislation and guidance issued by governments in a manner most beneficial to all industry participants.