EU Council Directive 2018/822/EU ("DAC6") imposes mandatory reporting of cross-border arrangements affecting at least one EU Member State that fall within one of a number of broad categories, referred to as 'hallmarks'. These hallmarks set out particular characteristics identified as being potentially indicative of aggressive tax planning in respect of which tax authorities now wish to gather more detail. However, the way DAC6 has been drafted means that it potentially also applies to vanilla transactions with no particular tax motive. Further, there is no safe harbour for arrangements having an underlying commercial purpose.
DAC6 implemented with retrospective effect (notwithstanding Brexit) but reporting deadlines delayed due to COVID-19
In May 2018 the Council of the European Union, as part of an increased global focus on tax transparency and in order to target aggressive tax-planning arrangements, made a series of amendments to EU Council Directive 2011/16/EU (on administrative cooperation in the field of taxation), to introduce DAC6. DAC6 came into force from 25 June 2018, although the implementing legislation in the UK was not published in draft form until the following year and the UK regulations were only made on 13 January 2020 and came into force on 1 July 2020. Therefore, the UK legislation has retrospective effect, as transactions where the first step was implemented on or after 25 June 2018 are potentially reportable.
Implementation of the reporting obligation has been delayed due to COVID-19, with the principal reporting obligation for arrangements coming into effect from 1 January 2021, with reports required to be made within 30 days from the relevant date. Further, for those cross-border arrangements that occur before that date and which are reportable, the following reporting deadlines will now apply:
- arrangements that were available or ready for implementation, or where the first step was implemented, or advice/aid was given by a UK intermediary, between 1 July 2020 and 31 December 2020 will be reportable in January 2021;
- arrangements entered into between 25 June 2018 and 30 June 2020, where the first step was implemented during that period, will have to be reported by 28 February 2021.
Despite this 6 month delay, advisers do not have long to review all of the relevant matters and assemble the necessary evidence - are you prepared?
It should be noted that the UK government confirmed these regulations still apply notwithstanding the UK's exit from the European Union until the end of the transition period. Although no substantive changes are expected quite how these regulations will function from 1 January 2021 in the post-Brexit legal framework remains to be seen.
Whilst DAC6 is principally focused on corporate transactions, these regulations still have serious implications for private clients and their professional advisers.
What does DAC6 mean for you?
Broadly, DAC6 provides that details of certain cross-border tax arrangements displaying one or more hallmarks must be reported to the relevant EU tax authority by promoters, intermediaries and in some cases by the relevant taxpayer. The reporting of such arrangements is compulsory and failure to comply will result in penalties (ranging from one-off penalties of £5,000 up to a maximum of £600 per day for the duration of the failure to report).
DAC6 then provides for automatic exchange of information between EU Member States (and the UK, post-Brexit), with the information collated by each relevant tax authority being shared on a quarterly basis. Due to the delays as a consequence of COVID-19, the UK's first exchange will now take place by 30 April 2021.
There are two criteria which, if met, will generally result in an arrangement being reportable under DAC6.
Firstly, it must be a cross-border arrangement where the transaction concerns two or more EU Member States or one EU Member State and a third country (ie those jurisdictions have some material relevance to the arrangement) and one of the following conditions is met: . not all participants in the arrangement are tax resident in the same jurisdiction; any of the participants has dual tax residency; any participant carries on business or activities in another jurisdiction via a permanent establishment (domestic arrangements are not expressly included); or the transaction could potentially impact the automatic exchange of information or the identification of beneficial ownership.
Secondly, the arrangement must display one (or more) of a number of hallmarks, which are essentially features of an arrangement indicating potential tax avoidance. That said, it should be noted that certain hallmarks, in particular to those flagged below regarding automatic exchanges of information and beneficial ownership, are not subject to the 'main benefit test' (i.e. where it can be established that the main benefit or one of the main benefits which a person can reasonably expect to derive from the arrangement in question is obtaining a tax advantage).
What are the key hallmarks?
The hallmarks most relevant and likely to be engaged by private clients and their advisers or intermediaries are those relating to automatic exchanges of information and beneficial ownership. In particular, conventional estate and tax planning that involves offshore structures could be caught.
In respect of information exchanges, under DAC6 any cross-border arrangement (or series of arrangements), which has the effect of undermining the reporting obligations under EU law or equivalent agreements with third countries (such as the Common Reporting Standard, 'CRS') will result in a reporting obligation arising. DAC6 lists a number of elements which are likely to be included in any such arrangement caught under this hallmark. Broadly, these are:
using investments which are not reportable under CRS whose features are 'substantially similar' to investments which are caught by CRS;
transferring assets or funds to jurisdictions which are not subject to CRS;
reclassifying funds or assets into products or payments which are not subject to CRS;
transferring or converting assets or funds into those which are not subject to CRS;
using arrangements or structures which purport to eliminate reporting; and
arrangements that undermine, or exploit weaknesses in, the due diligence procedures used by financial institutions, including the use of jurisdictions with inadequate or weak regimes of enforcement of anti-money-laundering legislation or with weak transparency requirements.
Where an arrangement has a 'non-transparent legal or beneficial ownership chain', it could also potentially be reportable under DAC6. The rules state that an arrangement will be caught where it uses 'persons, legal arrangements or structures':
that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
that are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures; and
where the ultimate beneficial owners of which are made unidentifiable.
Under what circumstances a beneficial owner is made 'unidentifiable' is unclear, but in the UK HMRC consider that the identity of the beneficial owner does not have to be publicly available as long as the beneficial owner can reasonably be identified by the relevant tax authorities.. Different jurisdictions also have differing definitions of beneficial ownership for CRS purposes, making this a confusing test. It is worth noting, however, that nearly all arrangements caught under these three criteria regarding beneficial ownership will most likely already be caught by the hallmark in respect of automatic exchanges of information, so ambiguities around the beneficial ownership hallmarks may be less material.
Professional advisers carry the primary reporting obligation
Concerning the actual reporting of any arrangement caught by DAC6, intermediaries have the principal reporting obligation. For the purposes of DAC6, an intermediary includes any person that 'designs, markets, organises or makes available for implementation or manages the implementation of' a cross-border arrangement. It also captures anyone who knows or could reasonably be expected to know that they have undertaken to provide (directly or indirectly) aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement. In both cases, the intermediary must have (broadly) an EU taxable presence or be registered with an EU legal, tax or consultancy services professional body. This broad definition would capture a wide range of professional advisers, including tax advisers, lawyers and accounting professionals across the EU. If multiple intermediaries are involved in a reportable arrangement, the reporting obligation falls onto each of them, both within the UK and in other EU jurisdictions. There are few exclusions from the reporting obligation but legal professional privilege is one of them. In the event there are no intermediaries with relevant reporting obligations, the reporting obligation will pass to the taxpayer.
If you would like to discuss how DAC6 may affect you and your business, please email your usual Withers contact or the authors of this article.