International Tax

The main objectives of DAC6 is to promote transparency and minimise international tax evasion by providing Tax Authorities with information to spot new risks of tax avoidance at an early stage. DAC6 is essentially part of the EU’s objectives of fighting tax evasion combined with the Common Reporting Standard (CRS). The DAC (EU Directive on Administrative Cooperation) was initiated with Directive 2011/16 which established the legal basis for administrative cooperation in the field of direct taxation in Europe. The DAC was then followed by:

• DAC1 Directive 2011/16/EU Art. 8 Automatic Exchange of Information on Five Non-Financial Categories; Income from Employment, Directors Fee, Pensions, Life Insurance, Immovable Property
• DAC2 Directive 2014/107/EU Common Reporting Standards; Automatic Exchange of Information on Financial Account Information
• DAC3 Directive 2015/2376/EU Automatic Exchange of Tax Rulings; Advance Cross Border Rulings, Advance Pricing Arrangements
• DAC4 Directive 2016/881/EU Automatic Exchange of Country by Country Reports; Revenues, Profits, Taxes Paid and Received, Accumulated Earnings, Number of Employees, Assets
• DAC5 Directive 2016/2258/EU ensures tax authorities have access to beneficial ownership information collected pursuant to the anti-money laundering legislation
• DAC6 Directive 2018/822/EU Mandatory Disclosure Regime on automatic exchange of reportable cross border arrangements.

The Member States must implement the DAC6 Directive into domestic law by no later than 31 December 2019. The first reports are not due until Aug 2020, and the 1st report must cover retrospective transactions from 25 June 2018 until 30 June 2020.

What is considered a cross-border arrangement?

An arrangement concerning either more than one EU Member State or a member state and a country outside of the EU.

Who is considered an intermediary?

An intermediary is anyone who aids the designing, marketing, organising, making available for implementation, or managing the implementation of a reportable cross-border arrangement.

What is reportable?

An arrangement will be reportable if it meets certain criteria called Hallmarks. Hallmarks are categorised from A to E as follows;

Category A: Generic Hallmarks linked to the main benefit test which means that one of the main objectives of the cross-border arrangement is to obtain a tax advantage. Generic hallmarks are arrangements that give rise to performance fees or involve mass-marketed schemes.

Category B: Specific Hallmarks linked to the main benefit test which includes certain tax planning features like buying a loss-making company to exploit its losses in order to reduce tax liability.

Category C: Specific Hallmarks related to cross-border transactions such as deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax.

Category D: Specific Hallmarks concerning the automatic exchange of information and beneficial ownership whereby an arrangement does not abide by the rules of the already existing agreement on automatic exchange of financial account information.

Category E: Specific Hallmarks concerning transfer pricing such as the arrangements involving the use of unilateral transfer pricing safe harbour rules.

What will happen if one does not comply?

Failure to comply and providing false or incomplete information to the authorities with respect to cross-border arrangements will lead to substantial administrative fines amounting to up to EURO 20,000 per violation.

A point of interest is whether administrative fines can really be imposed for failing to report the retrospective period of 25 June 2018 to the 1st July 2020. Our opinion is that such situations might lead to challenges in Court.

What about Cyprus?

The Cypriot Ministry of Finance introduced a draft bill (Law amending the Administrative Cooperation in the field of Taxation Laws of 2012 to No2 of 2018) on 19 March 2019 to transpose DAC6 into Cypriot national legislation. The draft bill is expected to be enacted by the 31 December 2019. As of today the draft bill is still under review by the Law Office of the Republic of Cyprus and it could well be a scenario that the bill will not be enacted on time. It is anticipated that the text of the Cypriot bill will be fully aligned with the EU Directive with no further changes. It is worth noting that VAT, other indirect taxes and duties are excluded from the scope of the draft bill. The Cypriot Tax Authorities are expected to issue an official guidance and provide clarifications on the interpretation of specific terms and provisions of the Cypriot Mandatory Disclosure Rules (MDR) legislation.

Our Take

Taxpayers and intermediaries involved in cross-border arrangements should asses their transactions, and procedures for recording and reporting tax arrangements in order to be fully prepared for meeting these obligations.

We are here to guide you with anything you may require related to DAC6.

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